IDEAS home Printed from https://ideas.repec.org/p/lar/wpaper/2015-07.html
   My bibliography  Save this paper

How do bankruptcy systems perform in Eastern Europe?

Author

Listed:
  • Régis BLAZY

    () (LaRGE Research Center, Université de Strasbourg)

  • Nicolae STEF

Abstract

For post-socialist countries that have undertaken long phases of economic and judicial transitions, an important aspect of attractiveness is based on the performances of their bankruptcy systems. Those performances are all the more essential in a context of non-mature capital markets. Precisely, bankruptcy procedures should, first generate substantial recoveries for the whole set of investors, and second share those recoveries in an adequate way – e.g. in a way that improves the investors’ individual incentives (in terms of monitoring, control, support, etc.). This article uses an original hand-collected database of 554 closed bankruptcy cases in three Eastern European countries (Hungary, Poland, and Romania) to evaluate the determinants of bankruptcy systems’ performances during the post-transition era (from year 2003 to 2010/11). In particular, we investigate whether the specificities of these local bankruptcy environments are significant enough to influence the creditors’ total recoveries. We also wonder whether those recoveries are impacted by the presence of private/public creditors and/or the concentration of their claims. This paper goes beyond a mere analysis of the creditors’ overall repayment, by focusing on the competition effects between them. Implementing competition is actually a core issue for post-transition economies, which have to mimic rivalry effects that usually prevail in more mature market economies. Precisely, we measure the priority order of repayment among competing classes of creditors (public, social, and private claims) and investigate the nature of competition (rivalry vs. ripple effects) among these classes. (1) We first confirm that the design of bankruptcy law “matters”: the creditors’ repayment is not independent from the type of bankruptcy procedure, and depends on the national environment in which such procedure is engaged. (2) On all three countries, the total recoveries do not benefit from the presence of public claimholders, even when those are in position of being residual claimants. Following Satjer (2010), this result suggests some passivity from the state, which has lost bargaining power under bankruptcy. On the contrary, the private claimholders exert a contrasting influence on total recoveries: positive for the junior ones (more involved under bankruptcy, to compensate their lack of protection), and negative for the secured ones (confirming the “lazy argument” attached to collaterals). (3) We also find that repayments are lower when the claims are concentrated: despite easier coordination, concentration may generate excessive influence from the largest creditors, willing to run bankruptcy adjudicat ion in their sole interests. (4) We show that the Eastern European bankruptcy systems provide stronger protection for private secured claims than for public claims. From that angle, the post-socialist economies mimic the prioritization of secured creditors that characterizes most Western European bankruptcy systems. (5) Last, we confirm that Eastern European bankruptcy systems have successfully implemented competition among the classes of creditors, which we interpret as a sign of maturity.

Suggested Citation

  • Régis BLAZY & Nicolae STEF, 2015. "How do bankruptcy systems perform in Eastern Europe?," Working Papers of LaRGE Research Center 2015-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  • Handle: RePEc:lar:wpaper:2015-07
    as

    Download full text from publisher

    File URL: http://ifs.u-strasbg.fr/large/publications/2015/2015-07.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Tomoe Moore, 2009. "Soft Budget Constraints in EU Transition Economy Enterprises," International Finance, Wiley Blackwell, vol. 12(3), pages 411-430, December.
    2. Begg, David & Portes, Richard, 1993. "Enterprise debt and financial restructuring in Central and Eastern Europe," European Economic Review, Elsevier, vol. 37(2-3), pages 396-407, April.
    3. Iraj Hashi, 1995. "The Economics of Bankrupcy, Reorganisation and Liquidation: Lessons for East European Transitional Economies," CASE Network Studies and Analyses 0041, CASE-Center for Social and Economic Research.
    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, June.
    5. Ewa Balcerowicz & Iraj Hashi & Jens Lowitzsch & Miklos Szanyi, 2003. "The Development of Insolvency Procedures in Transition Economies: a Comparative Analysis," CASE Network Studies and Analyses 0254, CASE-Center for Social and Economic Research.
    6. Bebchuk, Lucian Arye, 2000. "Using options to divide value in corporate bankruptcy," European Economic Review, Elsevier, vol. 44(4-6), pages 829-843, May.
    7. Grunert, Jens & Weber, Martin, 2009. "Recovery rates of commercial lending: Empirical evidence for German companies," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 505-513, March.
    8. Jappelli, Tullio & Pagano, Marco & Bianco, Magda, 2005. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 223-244, April.
    9. Legros Patrick & Mitchell Janet, 1995. "Bankruptcy as a Control Device in Economies in Transition," Journal of Comparative Economics, Elsevier, vol. 20(3), pages 265-301, June.
    10. Cornelli, Francesca & Felli, Leonardo, 1997. "Ex-ante efficiency of bankruptcy procedures," European Economic Review, Elsevier, vol. 41(3-5), pages 475-485, April.
    11. Earle, John S. & Telegdy, Almos, 2002. "Privatization Methods and Productivity Effects in Romanian Industrial Enterprises," Journal of Comparative Economics, Elsevier, vol. 30(4), pages 657-682, December.
    12. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
    13. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, vol. 64(6), pages 851-866, December.
    14. Oscar Couwenberg & Abe Jong, 2008. "Costs and recovery rates in the Dutch liquidation-based bankruptcy system," European Journal of Law and Economics, Springer, vol. 26(2), pages 105-127, October.
    15. Simeon Djankov & Oliver Hart & Caralee McLiesh & Andrei Shleifer, 2008. "Debt Enforcement around the World," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1105-1149, December.
    16. Blazy, Régis & Chopard, Bertrand & Nigam, Nirjhar, 2013. "Building legal indexes to explain recovery rates: An analysis of the French and English bankruptcy codes," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1936-1959.
    17. Blazy, Regis & Chopard, Bertrand, 2004. "Ex post efficiency of bankruptcy procedures: A general normative framework," International Review of Law and Economics, Elsevier, vol. 24(4), pages 447-471, December.
    18. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-151, Spring.
    19. Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
    20. Daigle, Katherine H & Maloney, Michael T, 1994. "Residual Claims in Bankruptcy: An Agency Theory Explanation," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 157-192, April.
    21. Baird, Douglas G., 1991. "The initiation problem in bankruptcy," International Review of Law and Economics, Elsevier, vol. 11(2), pages 223-232, September.
    22. Sergei A. Davydenko & Julian R. Franks, 2008. "Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K," Journal of Finance, American Finance Association, vol. 63(2), pages 565-608, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," EconomiX Working Papers 2017-26, University of Paris Nanterre, EconomiX.
    2. Jaka Cepec & Peter Grajzl & Katarina Zajc, 2016. "Debt Recovery in Firm Liquidations: Do Liquidation Trustees Matter?," CESifo Working Paper Series 6034, CESifo Group Munich.

    More about this item

    Keywords

    bankruptcy; attractiveness; recoveries; transition economies.;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lar:wpaper:2015-07. 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: (Christophe J. Godlewski). General contact details of provider: http://edirc.repec.org/data/lastrfr.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.