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An experimental study of the investment implications of bankruptcy laws

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  • Büyükboyacı, Mürüvvet
  • Gürdal, Mehmet Y.
  • Kıbrıs, Arzu
  • Kıbrıs, Özgür

Abstract

In bankruptcy laws, proportionality is the universal norm when allocating the liquidation value of a bankrupt firm among creditors. The theoretical literature on bankruptcy proposes two prominent alternatives to proportionality: the equal awards and the equal losses principles. We use an experiment to analyze and compare actual creditor behavior under these three principles. More specifically, we test the following hypotheses: replacing proportionality with equal losses increases total investment while replacing proportionality with equal awards decreases total investment; under all three principles individual investment choices decrease in response to an increase in the probability of bankruptcy or an increase in risk aversion; total investment difference between proportionality and either of the other two principles is independent of the probability of bankruptcy as long as both induce an interior equilibrium. The results of the nonparametric tests and random effects Tobit regression analyses we conduct on our experimental data offer support for all hypotheses.

Suggested Citation

  • Büyükboyacı, Mürüvvet & Gürdal, Mehmet Y. & Kıbrıs, Arzu & Kıbrıs, Özgür, 2019. "An experimental study of the investment implications of bankruptcy laws," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 607-629.
  • Handle: RePEc:eee:jeborg:v:158:y:2019:i:c:p:607-629
    DOI: 10.1016/j.jebo.2019.01.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Bankruptcy; Investment game; Experiment; Proportional; Equal losses; Equal awards; Investment;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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