The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the ...academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms’ relationships with key stakeholders (e.g., workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from “hibernation,” incurring the minimum bare expenses necessary to withstand the pandemic while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a pandemic. Financial sector policies can help channel credit to firms, but they are hard to implement and entail different trade-offs.
The Household Bankruptcy Decision Fay, Scott; Hurst, Erik; White, Michelle J.
The American economic review,
06/2002, Volume:
92, Issue:
3
Journal Article
Peer reviewed
Open access
New data is used from the Panel Study of Income Dynamics, which includes information on bankruptcy filings, to estimate a model of households' bankruptcy decisions. Support is found for the strategic ...model of bankruptcy, which predicts that households are more likely to file when their financial benefit from filing is higher. The model predicts that an increase of $1,000 in households' financial benefit from bankruptcy would result in a 7% increase in the number of bankruptcy filings.
Corporate bankruptcy prediction has attracted significant research attention from business academics, regulators and financial economists over the past five decades. However, much of this literature ...has relied on quite simplistic classifiers such as logistic regression and linear discriminant analysis (LDA). Based on a large sample of US corporate bankruptcies, we examine the predictive performance of 16 classifiers, ranging from the most restrictive classifiers (such as logit, probit and linear discriminant analysis) to more advanced techniques such as neural networks, support vector machines (SVMs) and “new age” statistical learning models including generalised boosting, AdaBoost and random forests. Consistent with the findings of Jones et al. (), we show that quite simple classifiers such as logit and LDA perform reasonably well in bankruptcy prediction. However, we recommend the use of “new age” classifiers in corporate bankruptcy modelling because: (1) they predict significantly better than all other classifiers on both the cross‐sectional and longitudinal test samples; (2) the models may have considerable practical appeal because they are relatively easy to estimate and implement (for instance, they require minimal researcher intervention for data preparation, variable selection and model architecture specification); and (3) while the underlying model structures can be very complex, we demonstrate that “new age” classifiers have a reasonably good level of interpretability through such metrics as relative variable importances (RVIs).
The Article III Problem in Bankruptcy Casey, Anthony J.; Huq, Aziz Z.
The University of Chicago law review,
07/2015, Volume:
82, Issue:
3
Journal Article
Peer reviewed
This Article reconsiders the implementation of Article III in the bankruptcy context. Recent rulings that limit the delegation of adjudicative power to non-Article III tribunals have generated ...uncertainty and profuse litigation. The Supreme Court's Article III cases in this domain lack any foundational account of why the power granted to bankruptcy judges implicates a constitutional problem. This Article identifies more precisely the Article III stakes in bankruptcy. Drawing on the well-tested creditors*-bargain theory of bankruptcy, this Article proposes a tractable, economically sophisticated constraint on congressional delegations. Our proposed account of bankruptcy courts' permissible domain minimizes Article III and federalism harms—the normative desiderata identified by the Court—while also enabling bankruptcy's core operations to continue unhindered. To illustrate its utility, the Article applies this account to a range of common bankruptcy disputes, demonstrating that most (but not all) of the Court's existing jurisprudence is sound in result, if not in reasoning.
We study contract design and coordination of a supply chain with one supplier and one retailer, both of which are capital constrained and in need of short-term financing for their operations. ...Competitively priced bank loans are available, and the failure of loan repayment leads to bankruptcy, where default costs may include variable (proportional to the firm’s sales) and fixed costs. Without default costs, it is known that simple contracts (e.g., revenue-sharing, buyback, and quantity discount) can coordinate and allocate profits arbitrarily in the chain. With only variable default costs, buyback contracts remain coordinating and equivalent to revenue-sharing contracts but are Pareto dominated by revenue-sharing contracts when fixed default costs are present. Thus, for general bankruptcy costs, contracts without buyback terms are of most interest. Quantity discount contracts fail to coordinate the supply chain, since a necessary condition for coordination is to proportionally reallocate debt obligations within the channel. With only variable default costs and with high fixed default costs exhibiting substantial economies-of-scale, revenue-sharing contracts with working capital coordination continue to coordinate the chain. Unexpectedly, for fixed default costs with small economies-of-scale effects, the two-firm system under a revenue-sharing contract with working capital coordination might have higher expected profit than the one-firm system. Our results provide support for the use of revenue-sharing contracts with working capital coordination for decentralized management of supply chains when there are bankruptcy risks and default costs.
This paper was accepted by Serguei Netessine, operations management.
The firm let me test my limits as a lawyer and I really thought I would never leave. When I hired Albert in 2011, I shared my vision of what I wanted the Court to be and he listened. Thank you for ...what you have done for the Court, thank you for being my friend and for being here tonight. "While I'm on the law clerk topic, one of Emory's own, Christina Morrison,1 will join chambers in September. Which reminds me, I have to compliment the law school.
The effects of personal bankruptcy law on the activities of traditional credit markets have attracted significant interests in many studies. In this study, we focus on the online Peer-to-Peer (P2P) ...lending market, and empirically investigate whether and to what extent personal bankruptcy law may affect the borrowing and lending activities in the P2P market. We find that state bankruptcy exemptions are positively associated with the likelihood of loan rejections and loan defaults. In addition, we document that state bankruptcy exmptions are associated with higher interest rates, and this effect is more prominent for wealthier borrowers. We also report that state bankruptcy exemptions are associated with smaller loan amount, and this effect is more prominent for borrowers with lower levels of assets. Our results are consistent with theories that state bankruptcy exemptions redistribute credit to wealthier borrowers.
Franchisors' long-term viability is tied to the ongoing operations of their franchisees. To ensure the ongoing performance of franchisees, franchisors deploy multiple governance mechanisms. This ...study assesses how governance mechanisms deployed to enhance franchisee ability (via selection and socialization) and motivation (via incentives and monitoring) impact franchisee bankruptcy. The authors examine the individual and joint effects of deploying governance mechanisms that share the same underlying objective, namely, to enhance franchisee ability and motivation. They also assess how motivation-inducing mechanisms may serve to counter the motivation-dampening effect of an increased royalty rate. Relying on data from multiple archival sources, the authors identify all bankruptcy filings by franchisees and their franchisors across 1,115 franchise systems over a 13-year observation window. Their findings document a positive and significant relationship between franchisee and franchisor bankruptcy. They also find main and interaction effects of the ability- and motivation-influencing governance mechanisms on the likelihood of franchisee bankruptcy, and the existence of significant bankruptcy spillovers among franchisees within the same franchise system. They discuss implications for franchise theory and management.
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