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Bankruptcy law and credit market: a general-equilibrium approach

Author

Listed:
  • Aloisio Araujo

    (EPGE/FGV and IMPA)

  • Bruno Funcha

    (FUCAPE Business School)

Abstract

This study has as its main objective to analyze the best bankruptcy procedure considering the conflict of interests between managers, secured creditors and trade creditors. Such trade-off is strictly connected with industry and countries characteristics, which is also relevant to the design of the bankruptcy law. Simulating a general-equilibrium model with incomplete marktes and bankruptcy, we show that for liquidation procedure that does not depreciates the failed assets too much, bankruptcy-liquidation produces better economic results for sectors intensive in physical capital. As the depreciation in liquidation increases and/or the industry sectors are less intensive in physical capital, the availability of reorganization produces better economic results. Using data of 44 countries, our results points that approximately 60% of the countries in the sample apply a procedure aligned with our suggestions.

Suggested Citation

  • Aloisio Araujo & Bruno Funcha, 2013. "Bankruptcy law and credit market: a general-equilibrium approach," Fucape Working Papers 39, Fucape Business School.
    • Handle: RePEc:bbz:fcpwps:39
    as

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    File URL: http://www.fucape.br/_public/workingpapers/39-2013.pdf
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    References listed on IDEAS

    as
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    3. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    4. Hart, Oliver & La Porta Drago, Rafael & Lopez-de-Silanes, Florencio & Moore, John, 1997. "A new bankruptcy procedure that uses multiple auctions," European Economic Review, Elsevier, vol. 41(3-5), pages 461-473, April.
    5. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September.
    6. Povel, Paul, 1999. "Optimal "Soft" or "Tough" Bankruptcy Procedures," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 659-684, October.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Bankruptcy; Legal System; Credit;
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