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Are there alternatives to bankruptcy? A study of small business distress in Spain

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  • Miguel García-Posada

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  • Juan Mora-Sanguinetti

Abstract

Small businesses, the majority of Spanish firms, rarely file for formal bankruptcy when dealing with financial distress. This is why business bankruptcy rates in Spain are among the lowest in the world, even during the current economic crisis. To explain this fact we present the following hypothesis. Filing for bankruptcy in Spain is very costly for both small firms and their creditors. Due to this, the capital structure of micro firms is biased towards mortgage loans, as it allows them to avoid bankruptcy by carrying out debt enforcement via mortgage foreclosures, which are cheaper procedures than bankruptcy, in case of financial distress. The empirical tests of our hypothesis consist of comparing the observed choices (choice of capital structure, choice between bankruptcy and mortgage) of Spanish firms with those of firms from countries (France and the UK) where their bankruptcy systems are more efficient and their laws do not incentivise them to bias their capital structure towards mortgage loans. Our findings corroborate the proposed hypothesis. As bankruptcy procedures and mortgage foreclosures are not perfect substitutes—i.e., they do not suit well the same type of firms- the underutilization of one of them—reflected in low bankruptcy rates- may lead to efficiency losses. Copyright The Author(s) 2014

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  • Miguel García-Posada & Juan Mora-Sanguinetti, 2014. "Are there alternatives to bankruptcy? A study of small business distress in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 287-332, August.
  • Handle: RePEc:spr:series:v:5:y:2014:i:2:p:287-332 DOI: 10.1007/s13209-014-0109-7
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    References listed on IDEAS

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    1. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2012. "Why do spanish firms rarely use the bankruptcy system? The role of the mortgage institution," Working Papers 1234, Banco de España;Working Papers Homepage.
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    Cited by:

    1. Bottasso, Anna & Conti, Maurizio & Sulis, Giovanni, 2017. "Firm dynamics and employment protection: Evidence from sectoral data," Labour Economics, Elsevier, vol. 48(C), pages 35-53.
    2. Juan Jimeno & Tano Santos, 2014. "The crisis of the Spanish economy," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, pages 125-141.
    3. Manuel García-Santana & Roberto Ramos, 2015. "Distortions and the size distribution of plants: evidence from cross-country data," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(3), pages 279-312, August.
    4. Fejér-Király Gergely, 2015. "Bankruptcy Prediction: A Survey on Evolution, Critiques, and Solutions," Acta Universitatis Sapientiae, Economics and Business, De Gruyter Open, vol. 3(1), pages 93-108, December.
    5. Miron Vasile Cristian Ioachim & Voiculescu Alina & Popa (Jeler) Ioana, 2015. "Analysis Models Of The Bankruptcy Risk In Romania’S Energy Sector," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 249-256, December.

    More about this item

    Keywords

    Bankruptcy; Mortgage; Insolvency; G33; G21; K0;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K0 - Law and Economics - - General

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