Firms’ innovative activities can be sensitive to public policies that affect the availability of capital. In this paper, we investigate the effects of regional and temporal variation in U.S. personal ...bankruptcy laws on firms’ innovative activities. We find that bankruptcy laws that provide stronger debtor protection decrease the number of patents produced by small firms. Stronger debtor protection also decreases the average quality, and variance in quality, of firms’ patents. We find evidence that the negative effect of stronger debtor protection on experimentation and innovation may be due to the decreased availability of external financing in response to stronger debtor rights, an effect amplified in industries with a high dependence on external financing. Hence, while it is typically assumed that stronger debtor protection encourages innovation by reducing the cost of failure for innovators, we show that it can instead dampen innovative activities by tightening the availability of external financing to innovative firms.
This paper was accepted by David Hsu, entrepreneurship and innovation
.
•Combining corporate government indicators (CGIs) and financial ratios (FRs) are examined for bankruptcy prediction.•In particular, seven and five different categories of FRs and CGIs are ...studied.•Solvency and profitability in FRs and board structures and ownership structures in CGIs are the most important features.
Effective bankruptcy prediction is critical for financial institutions to make appropriate lending decisions. In general, the input variables (or features), such as financial ratios, and prediction techniques, such as statistical and machine learning techniques, are the two most important factors affecting the prediction performance. While many related works have proposed novel prediction techniques, very few have analyzed the discriminatory power of the features related to bankruptcy prediction. In the literature, in addition to financial ratios (FRs), corporate governance indicators (CGIs) have been found to be another important type of input variable. However, the prediction performance obtained by combining CGIs and FRs has not been fully examined. Only some selected CGIs and FRs have been used in related studies and the chosen features may differ from study to study. Therefore, the aim of this paper is to assess the prediction performance obtained by combining seven different categories of FRs and five different categories of CGIs. The experimental results, based on a real-world dataset from Taiwan, show that the FR categories of solvency and profitability and the CGI categories of board structure and ownership structure are the most important features in bankruptcy prediction. Specifically, the best prediction model performance is obtained with a combination in terms of prediction accuracy, Type I/II errors, ROC curve, and misclassification cost. However, these findings may not be applicable in some markets where the definition of distressed companies is unclear and the characteristics of corporate governance indicators are not obvious, such as in the Chinese market.
We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents’ assets might be insufficient to satisfy their liabilities, leading to defaults. In ...case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.
This paper was accepted by Yinyu Ye, optimization.
I study the implications of two major debt-relief policies in the United States: the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and the Home Affordable Refinance Program (HARP). ...To do so, I develop a model of housing and default that includes relevant dimensions of credit-market policy and captures rich heterogeneity in household balance sheets. The model also explains the observed cross-state variation in consumer default rates. I find that BAPCPA significantly reduced bankruptcy rates, but increased foreclosure rates when house prices fell. HARP reduced foreclosures by 1 percentage point and provided substantial welfare gains to households with high loan-to-value mortgages.
We use credit default swaps (CDS) trading data to demonstrate that the credit risk of reference firms, reflected in rating downgrades and bankruptcies, increases significantly upon the inception of ...CDS trading, a finding that is robust after controlling for the endogeneity of CDS trading. Additionally, distressed firms are more likely to file for bankruptcy if they are linked to CDS trading. Furthermore, firms with more "no restructuring" contracts than other types of CDS contracts (i.e., contracts that include restructuring) are more adversely affected by CDS trading, and the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure in the resolution of financial distress.
The Challenges of Bankruptcy Reform Cirmizi, Elena; Klapper, Leora; Uttamchandani, Mahesh
The World Bank research observer,
08/2012, Volume:
27, Issue:
2
Journal Article
Open access
The 2008 financial crisis was followed by a global economic downturn, a credit crunch, and a reduction in cross-border lending, trade finance, and foreign direct investment, which adversely affected ...businesses around the world. The consequent increase in the number of firm insolvencies in the corporate sector highlights the need for commercial bankruptcy laws to liquidate efficiently unviable firms and reorganize viable ones, so as to maximize the total value of proceeds received by creditors, shareholders, employees, and other stakeholders. The authors summarize the theoretical and empirical literature on bankruptcy design, discuss the challenges of introducing and implementing bankruptcy reforms, and present examples of how policymakers are trying to take advantage of the current economic downturn as an opportunity to engage in meaningful reform of the bankruptcy process. They also review the main principles of efficient insolvency laws and bankruptcy procedures.
The Supply Chain Effects of Bankruptcy Yang, S. Alex; Birge, John R.; Parker, Rodney P.
Management science,
10/2015, Volume:
61, Issue:
10
Journal Article
Peer reviewed
This paper examines how a firm’s financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier–buyer relationships. We ...identify three effects—predation, bail-out, and abetment—that can change firms’ behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the nondistressed competitor behaves as if it has some first-mover advantage that could benefit a supplier with price control. The bail-out effect reflects the supplier’s incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor’s predation, leading to increased operational disadvantages for the distressed firm before bankruptcy. Together these effects stress that a firm’s bankruptcy potential can hurt its competitors and benefit its suppliers/customers. They also provide guidelines for firms’ operational decisions in such situations, a rationale for observed firm actions surrounding bankruptcies, and motivation for policies supporting reorganization and relaxing broad enforcement of nondiscriminatory pricing regulations.
This paper was accepted by Serguei Netessine, operations management
.
Using a novel data set that covers individual debt claims against 136 bankrupt US companies and includes information on a subset of claims transfers, we provide new empirical insight regarding how a ...firm’s debt ownership relates to bankruptcy outcomes. Firms with higher debt concentration at the start of the case are more likely to file prearranged bankruptcy plans, to move quickly through the restructuring process, and to emerge successfully as independent going concerns. Moreover, higher ownership concentration within a debt class is associated with higher recovery rates to that class. Trading of claims during bankruptcy concentrates ownership further, but this trading is not associated with subsequent improvements in bankruptcy outcomes and could, at the margin, increase the likelihood of liquidation.
Creditor rights and corporate risk-taking Acharya, Viral V.; Amihud, Yakov; Litov, Lubomir
Journal of financial economics,
10/2011, Volume:
102, Issue:
1
Journal Article
Peer reviewed
Open access
We propose that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce ...greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.
We develop a real options perspective to explore how an entrepreneur-friendly bankruptcy law can encourage entrepreneurship development at the societal level. If bankrupt entreprenuers are ...excessively punished for failure, they may let inherently high-risk but potentially high-return opportunities pass. We suggest that a more entrepreneur-friendly bankruptcy law, informed by a real options logic, can encourage more active and vibrant entrepreneurship development. We also discuss the implications of the role of venture capital and stigma in the effectiveness of an entrepreneur-friendly bankruptcy law.
PDF
