The Spanish Business Bankruptcy Puzzle and the Crisis

Spain has the world’s lowest business bankruptcy rate (number of formal business bankruptcies divided by number of firms). We document this fact, analyze the Spanish institutional framework and compare it with those of other European countries. We argue that a way to organize the documented evidence is to keep into account both the ex-post and the ex-ante efficiency repercussions of the Spanish institutional framework. We propose a view that is based on the idea that the unattractiveness of bankruptcy procedures and the efficiency of mortgage collateral lead Spanish firms to reduce the risk of bankruptcy. We show that this view is compatible with stylized features of firms’ capital structures, asset structures, and profitability. We conclude with a description of recent developments in bankruptcies and bankruptcy legislation in Spain, and with a brief discussion of potential policy implications.