Personal Bankruptcy Laws and Corporate Policies Chen, Yi-Wen; Halford, Joseph T.; Hsu, Hung-Chia Scott ...
Journal of financial and quantitative analysis,
11/2020, Volume:
55, Issue:
7
Journal Article
Peer reviewed
In this article we examine whether and how changes in personal bankruptcy laws, viewed as a shock to employees’ expected personal wealth, affect corporate policies. Following a reform in personal ...bankruptcy laws that limits individuals’ access to bankruptcy protection, firms more affected by this regulation reform increase labor costs, reduce investment, and engage in less risk taking. The effects are stronger when employees have more bargaining power. Furthermore, firms in industries characterized by high unemployment risk reduce leverage. These results support the view that firms choose more conservative policies to mitigate employees’ expected welfare losses.
Almost half of all the coal produced in the United States is mined by companies that have recently gone bankrupt. This Article explains how those bankruptcy proceedings have undermined federal ...environmental and labor laws. In particular, coal companies have used the Bankruptcy Code to evade congressionally imposed liabilities requiring that they pay lifetime health benefits to coal miners and restore land degraded by surface mining. Using financial information reported in filings to the Securities and Exchange Commission and in the companies' reorganization agreements, we show that between 2012 and 2017, four of the largest coal companies in the United States succeeded in shedding almost $5.2 billion of environmental and retiree liabilities. Most of these liabilities were backed by federal mandates. Coal companies disposed of these regulatory obligations by placing them in underfunded subsidiaries that they later spun off. When the underfunded successor companies liquidated, the coal companies managed to get rid of their regulatory obligations without defaulting on the pecuniary debts they owed to their creditors.
Objective: The objective of the article is to provide a solid outline how Islamic bankruptcy principles can be integrated into the Chinese legal system. Islamic bankruptcy law and Islamic finance ...have taken on a growing role in modern economies, with several governments aiming to align the economic system with Islamic principles in addition to solving some of the shortcomings of existing financial regulations related to bankruptcies. China has, within the last 40 years, become a major economy with significant development of its legal system. Theoretical framework: For the theoretical framework we utilized a comparative legal analysis framework for the integration, given that Islam emphasizes the importance that there should be no distinction between balance sheet insolvency and cashflow insolvency, as well as the importance of personal responsibility for the debts incurred. Method: For the method, we deployed a comparative analysis of the Islamic and Chinese bankruptcy legal framework. Results and conclusion: The article has presented a solid outline of the Islamic and Chinese bankruptcy laws and how Islamic principles can be integrated into the Chinese legal system. The arising system in the form of either a separate legal system or one integrating these principles into the existing bankruptcy regulations can significantly strengthen debtor responsibility and recovery rates, as well as encourage fairer business practices. Implications of the research: The research provides some critical insights into how Islamic Finance may be adjusted to support and reduce bankruptcy within China, outlining the major benefits of Islamic finance in strengthening the financial system. Originality/value: The article provides a unique outline of Islamic and Chinese bankruptcy laws and how Islamic principles may be integrated into the Chinese legal system.
We empirically study the effect of Chrysler’s Chapter 11 bankruptcy filing on the quantity sold by its competitors in the U.S. auto industry.
When financially distressed firms have overwhelming ...debts, a prominent option for survival is to file for Chapter 11 bankruptcy protection. We empirically study the effect of Chrysler’s Chapter 11 bankruptcy filing on the quantity sold by its competitors in the U.S. auto industry. The demand for competitors could increase because they may benefit from the distress of the bankrupt firm (competitive effect). By contrast, competitors could experience lower sales if the bankruptcy increases consumer uncertainty about their own viability (contagion effect). A challenge to measuring the impact of bankruptcies is the coincident decline in economic conditions stemming from the Great Recession and the potential effect of the “cash for clunkers” program (among other confounding factors). To identify the effect of the bankruptcy filing, we employ a regression-discontinuity-in-time design based on a temporal discontinuity in treatment (i.e., bankruptcy filing), along with an extensive set of control variables. Such a design is facilitated by a unique data set at the dealer–model–day level that allows us to compare changes in unit sales in close temporal vicinity of the filing. We find that unit sales for an average competitor decrease by 28% following Chrysler’s bankruptcy filing. Several types of evidence suggest that this negative demand spillover effect is driven by a heightened consumer uncertainty about the viability of the bankrupt firm’s rivals. For example, we show that the sales of competitors’ vehicles that compete within the same segments as the bankrupt firm’s vehicles or that provide lower value for money are affected more negatively in response to the Chrysler filing. We also observe more web search activity for Chrysler’s competitors after the filing. Our findings are robust to different estimation strategies (global versus local), different functional forms, different estimation windows, the inclusion of various controls (e.g., “cash for clunkers,” incentives, advertising, inventory, recalls, price, and consumer confidence), the donut regression discontinuity approach, a potential serial correlation issue, a falsification exercise, and the inclusion of differential trends at various levels. Our study aims to inform policymakers and managers about unintended short-term demand consequences of Chapter 11 bankruptcy.
The online appendices and data files are available at
https://doi.org/10.1287/mksc.2018.1138
.
Bankruptcy costs depend not only on the laws that govern financial distress but also on the ability of the court to rehabilitate distressed firms. This paper tests whether Chapter 11 restructuring ...outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act as an exogenous shock to caseloads, I find that commercial banks report lower charge-offs on business lending when court caseloads decline, suggesting that the costs of financial distress are lower in less-congested courts. Further, court caseload affects how restructuring takes place. Less-busy bankruptcy judges liquidate fewer small firms, but more large firms. When caseload declines, large firms spend less time in court and firms that are dismissed from court are less likely to refile for bankruptcy. In addition, firms are less likely to sell assets or obtain debtor-in-possession financing in less-busy courts.
The online appendix is available at
https://doi.org/10.1287/mnsc.2017.2808
.
This paper was accepted by Amit Seru, finance.
Fire Sales in a Model of Complexity CABALLERO, RICARDO J.; SIMSEK, ALP
The Journal of finance (New York),
December 2013, Volume:
68, Issue:
6
Journal Article
Peer reviewed
Open access
We present a model of financial crises that stem from endogenous complexity. We conceptualize complexity as banks' uncertainty about the financial network of cross exposures. As conditions ...deteriorate, cross exposures generate the possibility of a domino effect of bankruptcies. As this happens, banks face an increasingly complex environment since they need to understand a greater fraction of the financial network to assess their own financial health. Complexity dramatically amplifies banks' perceived counterparty risk, and makes relatively healthy banks reluctant to buy risky assets. The model also features a novel complexity externality.
Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and ...rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.
Deposits and bank capital structure Allen, Franklin; Carletti, Elena; Marquez, Robert
Journal of financial economics,
12/2015, Volume:
118, Issue:
3
Journal Article
Peer reviewed
Open access
In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit finance for banks. Despite risk neutrality, equity capital earns a higher ...expected return than direct investment in risky assets. Banks hold positive capital to reduce bankruptcy costs, but there is a role for capital regulation when deposits are insured. Banks could no longer use capital when they lend to firms instead of investing directly in risky assets. This depends on whether the firms are public and compete with banks for equity capital or are private with exogenous amounts of capital.
CEO turnover and bankrupt firms’ emergence Lin, Beiqi; Liu, Chelsea; Tan, Kelvin Jui Keng ...
Journal of business finance & accounting,
October-November 2020, 2020-10-00, 20201001, Volume:
47, Issue:
9-10
Journal Article
Peer reviewed
This paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under ...Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor‐in‐possession financing. Additionally, there is a significant increase in managerial quality post‐turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free‐fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.
•We design single and ensemble-based models to forecast bankruptcy.•We estimate a set of financial profiles that represent several archetypal situations.•We build bankruptcy prediction models that ...fit each financial profile.•We compare model performance using these two ways of designing models.•Profile-based models perform better than single and ensemble-based models.
Ensemble techniques such as bagging or boosting, which are based on combinations of classifiers, make it possible to design models that are often more accurate than those that are made up of a unique prediction rule. However, the performance of an ensemble solely relies on the diversity of its different components and, ultimately, on the algorithm that is used to create this diversity. It means that such models, when they are designed to forecast corporate bankruptcy, do not incorporate or use any explicit knowledge about this phenomenon that might supplement or enrich the information they are likely to capture. This is the reason why we propose a method that is precisely based on some knowledge that governs bankruptcy, using the concept of “financial profiles”, and we show how the complementarity between this technique and ensemble techniques can improve forecasts.
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