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Ex-ante Efficiency of Bankruptcy Procedures

Author

Listed:
  • Francesca Cornelli

    (London Business School)

  • Leonardo Felli

    (London School of Economics)

Abstract

This paper suggests a framework to analyze the efficiency properties of bankruptcy procedures, distinguishing between ex-ante and ex-post efficiency. Ex-post efficiency consists in maximizing the ex-post value of the insolvent firm, whereas ex-ante efficiency consists in maximizing the proceeds to creditors from the reorganization of the firm and providing incentives for the creditors to monitor the firm. We show that the definition of creditors rights over the company and the protection of the creditors' seniority, are crucial to asses the ex-ante efficiency of a bankruptcy procedure.

Suggested Citation

  • Francesca Cornelli & Leonardo Felli, 1996. "Ex-ante Efficiency of Bankruptcy Procedures," Finance 9610001, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9610001 Note: Type of Document - Latex; prepared on IBM PC - PC-TEX; to print on PostScript 300DPI; pages: 14
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    References listed on IDEAS

    as
    1. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
    2. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December.
    3. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Franks, Julian R & Torous, Walter N, 1992. "Lessons from a Comparison of U.S. and U.K. Insolvency Codes," Oxford Review of Economic Policy, Oxford University Press, vol. 8(3), pages 70-82, Autumn.
    6. Baird, Douglas G & Picker, Randal C, 1991. "A Simple Noncooperative Bargaining Model of Corporate Reorganizations," The Journal of Legal Studies, University of Chicago Press, pages 311-349.
    7. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
    8. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
    9. Luigi Zingales, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 425-448.
    10. Bebchuk, Lucian Ayre & Chang, Howard F, 1992. "Bargaining and the Division of Value in Corporate Reorganization," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 253-279, April.
    11. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bankruptcy; ex-ante efficiency; revenue efficiency; absolute priority rule;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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