Recent Comparative Bankruptcy-Related Articles of Interest Available for Downloading from SSRN

The following comparative bankruptcy-related papers, arranged by abstract ID number, can be downloaded from the Social Science Research Network:

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Federal Reserve Bank of Atlanta's Robert A. Eisenbeis: "Home Country versus Cross-Border Negative Externalities in Large Banking Organization Failure and How to Avoid Them" (Abstract ID: 947093)

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Univ. of Verona's Andrea Gamba, Mamen Aranda, and Danielle Poiega: "Investment and Credit Risk: A Structural Approach" (Abstract ID: 945968)

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Politécnico Grancolombiano's Ignacio Velez-Parerja and Univ. of the Andes's Patricia Rojas: "Some Evidence on Financial Distress Costs and Their Effect on Cash Flows" (Abstract ID: 939731)

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Cornell University's Robert T. Masson, Yale School of Management's Heather Tookes, and Samsung's Yaejong Um: "Firm Diversification and Equilibrium Risk Pooling: The Korean Financial Crisis as a Natural Experiment." (Abstract ID: 938274)

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Clifford Chance LLP's Tomas Richter: "Two (Further) Possible Explanations of the Secured Debt Puzzle: A Note." (Abstract ID: 929692)

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Boston University School of Law's Richard Thompson Ainsworth: "A Comparative Assessment of EU, UK, French, Australian and Japanese Responses to Auditor Independence: The Case of Non-Audit Tax Services." (Abstract ID: 928621)

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Catholic University of Louvain's Juan D. Moreno-Ternero: "Proportionality and Non-Manipulability in Bankruptcy Problems." (Abstract ID: 927763)

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Politechnico Grancolombiano's Ignacio Velez-Pareja and Univ. of Andes' Patricia Rojas: "Some Evidence of Financial Distress Costs (Alguna Evidencia sobre los Costos de Dificultadas Financieras)." (Abstract ID: 927328)

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University of Münster's Alexander Dilger: "Forced to Make Mistakes: Reasons for Complaining about Bebchuk's Scheme and Other Market-Oriented Insolvency Procedures." (Abstract ID: 926086)

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Catholic University of Leuven's Nico Dewaelheyns: "Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?" (Abstract ID: 924033

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World Bank's Xavier Gine and Inessa Love: "Do reorganization costs matter for efficiency?  Evidence from a bankruptcy reform in Colombia." (Abstract ID: 923277)

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Max Planck School of Economics's Eva-Maria Steiger: "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings." (Abstract ID: 921540)

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Univ. of Kaiserslautern's Holger Kraft and Mogens Steffensen: "An ABC Portfolio Choice: Asset Allocation with Bankruptcy and Contagion." (Abstract ID: 921182)

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University of East Anglia's Andreas Stephan: "The Bankruptcy Wildcard in Cartel Cases." (Abstract ID: 912169)

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Stockholm School of Economics's Stefano Rossi and Stockholm University's Nicola Gennaioli: "Bankruptcy, Creditor Protection and Debt Contracts." (Abstract ID: 891154)

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Univ. of Osnabruck's Jochen Bigus and the Max Planck Institute of Economics's Eva-Maria Steiger: "When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings." (Abstract ID: 868365)

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U.S. Court of International Trade's Robert F. Weber: "Can the Sauvegarde Reform Save French Bankruptcy Law?: A Comparative Look at Chapter 11 and French bankruptcy Law from an Agency Cost Perspective." (Abstract ID: 802944)

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Abstracts for each of these papers follows:

 Robert A. Eisenbeis, "Home Country versus Cross-Border Negative Externalities in Large Banking Organization Failure and How to Avoid Them" (Abstract ID: 947093):

This paper examines the negative externalities that may occur when a large bank fails, describes the nature of those externalities, and explores whether they may be greater in a case involving a large cross-border banking organization. The analysis suggests that the chief negative externalities are associated with credit losses and losses due to liquidity problems, and these losses are critically affected by how promptly an insolvent institution is closed, how quickly depositors gain access to their funds, and how long it takes borrowers to reestablish credit relationships. While regulatory delay and forbearance may affect the size and distribution of losses, the likely incident of systemic risk and the negative externalities are more associated with the structure of the applicable bankruptcy laws and methods available to resolve a failed institution and quickly get it operating again. This circumstance implies that regulatory concerns about systemic risk should be directed first at closing institutions promptly, reforming bankruptcy statutes to admit special procedures for handling bank failures, and providing mechanisms to give creditors and borrowers prompt and immediate access to their funds and lines of credit.

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Andrea Gamba, Mamen Aranda, and Danielle Poiega, "Investment and Credit Risk: A Structural Approach" (Abstract ID: 945968):

The paper investigates the impact on credit risk of capital structure choices driven by firm's investments and financing decisions. To this purpose we propose a dynamic structural model featuring endogenous investment, capital structure and default. Investments are partially irreversible and are financed with internal equity as well as by issuing bonds and shares. In case of financial distress, fire sales of capital are at a discount. The firm has a convex tax function and faces constant and proportional debt adjustment costs and equity flotation costs. Investors face personal taxes and, in case of default, bondholders pay bankruptcy costs.

We calibrate the model on accounting and market data. Using simulation, we test the fitting of standard metrics of credit worthiness, like interest rate coverage, default rate, and the distribution of firms across rating classes, produced by the model to the empirical metrics. To highlight the effect of different degree of flexibility on credit risk, the same results are obtained also with two simplified versions of the model, one with only exogenous investment, in line with Fischer, Heinkel, and Zechner (1989), and one with both exogenously determined investment and capital structure, in the same spirit of Leland (1994).

We find that the introduction of investment flexibility has the largest impact on credit risk among the studied features. Moreover, the more general model generates realistic distributions of firms across rating classes and realistic ranges of credit spreads, default rates, and interest rate coverage.

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Ignacio Velez-Parerja and Patricia Rojas: "Some Evidence on Financial Distress Costs and Their Effect on Cash Flows" (Abstract ID: 939731):

In this work we explore the effect of book value leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistical evidence on the influence of the book value leverage level in the financial distress or bankruptcy costs that appear as measured by the worsening of those indexes. Four dependent variables were explored: gross margin, operating margin, real growth in sales and payment terms from suppliers. In order to estimate the financial distress and bankruptcy costs associated with each dependent variable, logarithmic and semi-logarithmic models were constructed using data panel. We used a balanced sample composed by 644 firms from the commercial Colombian industry, provided by the Superintendence of Societies of Colombia. We also examined an unbalanced sample of 683 firms with Ordinary Least Squares (OLS) analysis. We found that there exists a relationship between book value leverage perceived by the market and gross margin. This allows us to explore the possibility to introduce the financial distress costs in the cash flows. The aim of the study is to explore a model that allows the analyst to include this effect in the forecasted financial statements. When this effect is included in the financial statements the free cash flows will be affected and hence the interaction of cash flows, cost of capital (weighted average cost of capital) and firm value calculated with the cash flows will eventually allow determining an optimal capital structure.

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Robert T. Masson, Heather Tookes, and Yaejong Um, "Firm Diversification and Equilibrium Risk Pooling: The Korean Financial Crisis as a Natural Experiment." (Abstract ID: 938274):

We use the Korean Financial Crisis as a natural laboratory for examining interactions among firm diversification, equilibrium capital structure and tail probability events. When the crisis hit in 1997, several major firms, including a large number of highly leveraged conglomerates (Chaebols), experienced bankruptcies. In a simple model, we show how diversified Chaebols are able to obtain higher levels of equilibrium debt than non-Chaebol firms (ceteris paribus) due to protective effects of cosigners. In the event of an unanticipated shock, the model predicts a systematic change in relative bankruptcy risks of Chaebol firms. To examine this implication, we first estimate a model of equilibrium debt determination for a sample of Korean manufacturing firms for the years 1991-1994. We then introduce a new empirical methodology that allows us to decompose equilibrium debt into demand, supply and Chaebol-specific factors. To improve our understanding of the mechanisms driving the widespread failures, we use decomposed debt to estimate a bankruptcy prediction model for the post-crisis period. Our main finding is that benefits from shared risks may, in fact, lead to shared vulnerability: The primary cause of bankruptcies of Chaebol firms was not idiosyncratic leverage, but instead leverage systematically related to their greater equilibrium access to debt during normal times.

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Tomas Richter, "Two (Further) Possible Explanations of the Secured Debt Puzzle: A Note." (Abstract ID: 929692):

Since at least the early 1980's, students of financial economics and law & economics have puzzled over the question whether secured debt - and more importantly, its priority in bankruptcy, apparently ubiquitous in the real world - can or cannot be explained in terms of economic efficiency. The discussion, intellectually enticing as it may be, seems to lead nowhere. One would almost be tempted to discard the entire enterprise using Ronald Regan's alleged quote claiming that an economist is someone who will convince you that something that works perfectly well in practice cannot work in theory. Before that is done, I thought that I would contribute to the debate with two further possible explanations of the puzzle. My ambition is not to be conclusive - as evidenced by the fact that one of the explanations I forward is benign whereas the other one is malign. What I hope to show, however, is that a look from outside of the world of mature legal and other institutions can bring about observations that may perhaps slip the eye of the beholder who takes such institutions for granted.

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Richard Thompson Ainsworth, "A Comparative Assessment of EU, UK, French, Australian and Japanese Responses to Auditor Independence: The Case of Non-Audit Tax Services." (Abstract ID: 928621):

Auditor independence was a global concern of financial regulators in the 1990's. Some observers saw this in a positive light, a natural development. Adjusting auditor independence rules was a manifestation of global convergence in corporate governance structures. New rules, especially rules leaning toward a harmonized system were welcome.

There was a more sobering view. This view held that global regulators were less concerned with convergence than they were with a sense of impending disaster. Things had gone too far. Significant, maybe even radical change was needed. The independence of corporate auditors had eroded; trust had been fundamentally compromised in the quest for audit firm profits. Corrective measures were needed immediately to avert widespread financial collapse.

The new century did bring startling events: the collapse of HIH (March, 2001) and One.Tel (July, 2001) in Australia; the bankruptcy of Enron (October, 2001), and WorldCom (June, 2002) in the US. In the EU similar scandals broke. There was Vivendi (July 2002) in France, Ahold (February, 2003) in the Netherlands, and Parmalat (February, 2003) in Italy. Were the early years of this century a time of global convergence or a time of financial collapse attributable to widespread accounting failure?

This paper considers global changes in the regulation of the statutory corporate auditor. It focuses on non-audit tax services as an instance where real movement toward convergence of corporate governance can be seen.

The US has responded to the most serious criticisms of its rules-only-based method of setting standards. With respect to non-audit services generally, the US has eliminated exceptions, limitations, bright-line and percentage tests. Specifically in the area of tax services, the US is directly tying principles with operational rules. This represents a significant movement toward a principles-based method of setting standards.

For its own part, the US has been critical of foreign principles-only standards. In particular, the US is critical of these regulations when they do not provide a sufficiently detailed structure, resulting in a standard that is not clearly operationalized. The SEC feels that principles-only-based rules depend too much on the exercise of individual judgment.

Like the UK, the US believes that more direction is needed. The rules need not be as restrictive as the French envision, but they need to be considerably more specific than the rules that have been advanced in the EU and Australian legislation. The US is no longer comfortable with the assumption of the Levitt regulations, an assumption that still underpins rules in the EU, Australian and elsewhere, that the tax authorities provide enough oversight of the auditor in tax matters so that security regulation can be relaxed.

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Juan D. Moreno-Ternero, "Proportionality and Non-Manipulability in Bankruptcy Problems." (Abstract ID: 927763):

We explore the relationship between proportionality and manipulation (via merging or splitting agents' claims) in bankruptcy problems. We provide an alternative proof to the well-known result that, in an unrestricted domain, immunity to manipulation is equivalent to requiring proportional division. We show that this result also holds for restricted (but sufficiently rich) domains, such as the domain of simple problems and the domain of zero-normalized problems. Finally, we characterize two adjustments of the proportional rule by combining non-manipulabilty on these domains and the usual axioms of independence of claims truncation and composition from minimal rights. 

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Ignacio Velez-Pareja and Patricia Rojas, "Some Evidence of Financial Distress Costs (Alguna Evidencia sobre los Costos de Dificultadas Financieras)." (Abstract ID: 927328):

In this work we explore several hypotheses about the effect of leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistic evidence on the existence of the influence of the book value leverage level in the financial distress or bankruptcy costs that appear as a consequence of the worsening of those indexes. Four hypotheses were explored with the following dependent variables: gross margin, operating margin, real growth in sales and payment terms from suppliers. In order to estimate the financial distress and bankruptcy costs associated with each dependent variable, semi-log and lineal models were constructed using data panel. The data sample used was composed of 644 firms from the commercial Colombian industry, provided by the Superintendence of Societies of Colombia. We also examined an unbalanced sample of 683 firms with regression analysis. We found that there exists a relationship between book value leverage perceived by the market and the real growth and gross margin. This allows us to explore the possibility to introduce the financial distress costs in the cash flows. The aim of the study is to propose a model that allows the analyst to include this effect in the forecasted financial statements. When this effect is included in the financial statements the free cash flows will be affected and hence the interaction of cash flows, cost of capital (weighted average cost of capital) and firm value calculated with the cash flows will eventually allow determining an optimal capital structure.

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Alexander Dilger, "Forced to Make Mistakes: Reasons for Complaining about Bebchuk's Scheme and Other Market-Oriented Insolvency Procedures." (Abstract ID: 926086):

Bebchuk's proposal for bankruptcy reform is analysed, in particular his claim that using options is fair and prevents justified complains. However, the proposal has a systematic bias against junior creditors and former shareholders because they have to pay for unavoidable mistakes in estimating the company's value, may lack the financial resources to exercise their options and lose by a day of reckoning. A market solution will be specified that is simpler and at least as fair as Bebchuk's scheme according to his own standards. However, a complete solution to these problems may have to be a non-market one.

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Nico Dewaelheyns, "Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?" (Abstract ID: 924033): 

Most models in the bankruptcy prediction literature implicitly assume companies are stand-alone entities. However, in view of the importance of business groups in Continental Europe, ignoring group ties may have a negative impact on predictive reliability. We find that models encompassing both bankruptcy variables defined at subsidiary level and at group level have a substantially better fit and classification performance. Furthermore we find that the group`s support causes improved survival chances for subsidiaries, especially when these subsidiaries belong to the group`s core business. Overall our results are consistent with existing theoretical and empirical findings from the internal capital markets literature.

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Xavier Gine and Inessa Love, "Do reorganization costs matter for efficiency?  Evidence from a bankrutcy reform in Colombia." (Abstract ID: 923277):

The authors study the effect of reorganization costs on the efficiency of bankruptcy laws. They develop a simple model that predicts that in a regime with high costs, the law fails to achieve the efficient outcome of liquidating unviable businesses and reorganizing viable ones. The authors test the model using the Colombian bankruptcy reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, they find that the pre-reform reorganization proceeding was so inefficient that it failed to separate economically viable firms from inefficient ones. In contrast, by substantially lowering reorganization costs, the reform improved the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.

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Eva-Maria Steiger, "Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings." (Abstract ID: 921540): 

Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer's incentives prior to distress and during a "period of good conduct" following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor's choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.

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Holger Kraft and Mogens Steffensen, "An ABC Portfolio Choice: Asset Allocation with Bankruptcy and Contagion." (Abstract ID: 921182): 

In this paper, we consider the asset allocation problem of an investor allocating his funds between several corporate bonds and a money market account. In particular, we provide a realistic model of financial distress: Firstly, we model Chapter 7 and Chapter 11 bankruptcies as different possible outcomes of financial distress. Secondly, we take into consideration that, in practice, default is not the end, but the beginning of financial distress, eventually leading to a reorganization or a liquidation of a distressed firm. Thirdly and most importantly, we are able to analyze the impact of contagion on an investor's demand for corporate bonds. Contagion is an important phenomenon, as it reduces the investor's ability to diversify his portfolio. Although widely recognized in the literature about the pricing of defaultable securities, to our knowledge, little work has been done quantifying the impact of contagion on security demands in a continuous-time framework. Finally, numerical examples demonstrate that all these factors significantly influence the portfolio decision of an investor.

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Andreas Stephan, "The Bankruptcy Wildcard in Cartel Cases." (Abstract ID: 912169): 

Where fines are the only available sanction against cartels there is a trade-off between increased deterrence and the increased risk of insolvency. Higher fines are unacceptable to the European Commission because of the costs and uncertainties associated with bankruptcy. These concerns have led to the emergence of a 'financial constraints' discount which is applied with a lack of transparency and may be strongly influenced by the EC treaty objectives of protecting employment and social justice. Such bankruptcy discounts encourage infringing firms to paint as gloomy a picture of their financial situation as possible to reduce their cost of collusion. They also provoke cartel members into raising prices further, safe in the knowledge that they will never incur fines high enough to threaten their financial viability. The existence in the US of a parallel 'loose' bankruptcy discount allows international infringing firms to cite sanctions previously incurred in the US as grounds for 'financial constraints' in Europe. The effect is lower fines to the detriment of EC deterrence and international enforcement.

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Stefano Rossi and Nicola Gennaioli, "Bankruptcy, Creditor Protection and Debt Contracts." (Abstract ID: 891154):

We study theoretically how creditor protection affects the parties' ability to resolve financial distress by contract. Our central finding is that better creditor protection allows parties to write more sophisticated contracts, including options and court intervention - as opposed to cash auctions - to decide whether to liquidate or continue a financially distressed project, thereby attaining higher welfare. Our analysis yields novel predictions on how debt contracts and debt structure should vary around the world. We reconcile current conflicting proposals for bankruptcy reform, and rationalize resolutions of financial distress around the world as a function of creditor protection. The normative implication of our analysis is that bankruptcy law should facilitate contractual resolutions of financial distress by providing an ex post enforcement mechanism to deter debtors' self-dealing and tunneling activities.

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Jochen Bigus and Eva-Maria Steiger, "When it Pays to be Honest: How a Variable Period of Good Conduct can Improve Incentives in Personal Bankruptcy Proceedings." (Abstract ID: 868365):

Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors' best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer's ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

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Robert F. Weber, "Can the Sauvegarde Reform Save French Bankruptcy Law?: A Comparative Look at Chapter 11 and French bankruptcy Law from an Agency Cost Perspective." (Abstract ID: 802944):

This paper aims to cast Chapter 11 as concerned primarily with the agency problems and conflicts that inhere in the bankruptcy context. Chief among these problems is management's increased appetite for risk and the urge for management to wait out financial difficulties to the detriment of the firm as a whole. Chapter 11 mitigates these agency conflicts and their concomitant costs by ceding control - and in some cases cash or securities - to managers who timely file for bankruptcy protection. Since the agency problem is impossible to avoid altogether, Chapter 11 is likely to remain useful in this context, despite its drawbacks (e.g., increased cost of capital). French bankruptcy law is undergoing a dramatic development at the moment, and is moving towards a Chapter 11 framework where managers have an integral role in the reorganization process. The paper argues the former French bankruptcy regime was ineffectual largely as a result its embedded misconception of the fundamental agency conflicts that insolvent firms undergo. The new sauvegarde procedure is considered and described as a welcome step for French bankrupts, workers, and most commercial parties.

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