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A Study of Inefficient Going Concerns in Bankruptcy

  • Franks, Julian R
  • Lóránth, Gyöngyi
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    This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency.

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    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5035
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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5035.

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    Date of creation: May 2005
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    Handle: RePEc:cpr:ceprdp:5035
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    1. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    2. Brunner, Antje & Krahnen, Jan Pieter, 2006. "Multiple lenders and corporate distress: Evidence on debt restructuring," CFS Working Paper Series 2001/04, Center for Financial Studies (CFS).
    3. Per Stromberg, . "Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests," CRSP working papers 459, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. 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.
    5. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
    6. Dan Bernhardt & Ed Nosal, 2003. "Nearsighted justice," Working Paper 0304, Federal Reserve Bank of Cleveland.
    7. Gilson, Stuart C, 1997. " Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 52(1), pages 161-96, March.
    8. Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
    9. James, Christopher, 1995. "When Do Banks Take Equity in Debt Restructurings?," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1209-34.
    10. Ernst-Ludwig VON THADDEN & Erik BERGLÖF & Gérard ROLAND, 2003. "Optimal Debt Design and the Role of Bankruptcy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.13, Université de Lausanne, Faculté des HEC, DEEP.
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