IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The costs and benefits of secured creditor control in bankruptcy: Evidence from the UK

  • John Armour
  • Audrey Hsu
  • Adrian Walters
Registered author(s):

    Recent theoretical literature has debated the desirability of permitting debtors to contract with lenders over control rights in bankruptcy. Proponents point to the monitoring benefits brought from concentrating control rights in the hands of a single lender. Detractors point to the costs imposed on other creditors by a senior claimant's inadequate incentives to maximise net recoveries. The UK provides the setting for a natural experiment regarding these theories. Until recently, UK bankruptcy law permitted firms to give complete ex post control to secured creditors, through a procedure known as Receivership. Receivership was replaced in 2003 by a new procedure, Administration, which was intended to introduce greater accountability to unsecured creditors to the governance of bankrupt firms, through a combination of voting rights and fiduciary duties. We present empirical findings from a hand-coded sample of 348 bankruptcies from both before and after the change in the law, supplemented with qualitative interview data. We find robust evidence that whilst gross realisations have increased following the change in the law, these have tended to be eaten up by concomitantly increased bankruptcy costs. The net result has been that creditor recoveries have remained unchanged. This implies that dispersed and concentrated creditor governance in bankruptcy may be functionally equivalent.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.cbr.cam.ac.uk/pdf/WP332.pdf
    Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Howard Cobb)


    Download Restriction: no

    Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp332.

    as
    in new window

    Length:
    Date of creation: Sep 2006
    Date of revision:
    Handle: RePEc:cbr:cbrwps:wp332
    Note: PRO-2
    Contact details of provider: Web page: http://www.cbr.cam.ac.uk/

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," CEP Discussion Papers dp0093, Centre for Economic Performance, LSE.
    2. John Armour, 2006. "Should we redistribute in insolvency," ESRC Centre for Business Research - Working Papers wp319, ESRC Centre for Business Research.
    3. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
    4. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, 06.
    5. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, Springer, vol. 9(1), pages 65-96, 03.
    6. Alan Schwartz, 1997. "Contracting About Bankruptcy," Yale School of Management Working Papers ysm71, Yale School of Management.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cbr:cbrwps:wp332. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.