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

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

 

[The inset image was taken from Tom Kirkendall's post on the passage last August of "long-awaited amendments to China's bankruptcy laws."  These amendments took effect June 1, 2007.  Those clammering for more on China's bankruptcy laws, be sure to read this interview with Cadwalader's Deryck Palmer and John Rapisardi, as well as this post by Dan Harris on the China Law Blog.  There's also a helpful recent summary written by DLA Piper's China-based partners Prue Mitchell, Louis Meng, and Lampros Vassilou entitled, China's New Bankruptcy Law: A Long-Awaited Compromise.]


[6/12/07 - Update:  Check out Bob Eisenbach's follow up on China's new bankruptcy law at his (In the Red) Business Bankruptcy Blog, which links to an English translation of the new law and other pertinent topics.]

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Univ. Paris IX Dauphine's Anne Epaulard and Univ. of Lausanne's Aude Pommeret, "Bankruptcy Law and Firms' Behavior" (Abstract ID: 987999)

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York University Law School's Stephanie Ben-Ishai, "Bankruptcy for the Poor?" (Abstract ID: 974779)

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London Business School's Viral V. Acharya and Emory University's Krishnamurthy Subramanian, "Bankruptcy Codes and Innovation" (Abstract ID: 971566)

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Cranfield University's Vineet Agarwal and Univ. of Edinburgh's Richard Taffler, "Comparing the Performance of Market-Based and Accounting-Based Bankruptcy Prediction Models" (Abstract ID: 968252)

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Cranfield University's Puliyur Sudarsanam, Nottingham University's Mike Wright, and Cranfield University's Jian Huang, "Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk" (Abstract ID: 967731)

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Institute for Macroeconomic Analysis and Development's Arjana Brezigar Masten and Univ. of Ljubijana's Igor Master, "Comparison of Parametric, Semi-Parametric and Non-Parametric Methods in Bankruptcy Prediction" (Abstract ID: 967637)

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Nagoya City University's Kotaro Inoue, Nagoya University's Hideaki Kiyoshi Kato, and Nanzan University's Marc Bremer, "Corporate Restructuring in Japan: Who Monitors the Monitor?" (Abstract ID: 965595)

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Domagoj Satjer, "Must Bankruptcy Administrators Be Corporate Undertakers? Creation and European Perspectives of Restructuring in Bankruptcy" (Abstract ID: 965367)

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Cambridge Associates Asia Pte Ltd's Beng Tat Lee, "Claiming a Pound of Flesh as a Contingent or Prospectives Creditor Under the Companies Act" (Abstract ID: 965259)

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Univ. of Waterloo's J. Efrim Boritz and Duane B. Kennedy and Univ. of Auckland's Jerry Y. Sun, "Predicting Business Failures in Canada" (Abstract ID: 963767)

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Univ. of Amsterdam's Joseph A. McCahery, "Creditor Protection in a Cross-Border Context" (Abstract ID: 963348)

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Univ. of Milan's Francesco Denozza, "Different Policies for Corporate Creditor Protection" (Abstract ID: 963345)

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Univ. of Mainz's Peter O. Mulbert, "A Synthetic View of Different Concepts of Creditor Protection, Or: A High-Level Framework for Corporate Creditor Protection" (Abstract ID: 963342)

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Univ. of Munich's Horst Eidenmuller, "Trading in Times of Crisis: Formal Insolvency Proceedings, Workouts and the Incentives for Shareholders/Managers" (Abstract ID: 963337)

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Univ. of Freiburg's Hanno Merkt, "Creditor Protection Through Mandatory Disclosure" (Abstract ID: 963327)

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Abstracts for each of these papers follows: 

Anne Epaulard and  Aude Pommeret: "Bankruptcy Law and Firms' Behavior" (Abstract ID: 987999):

The aim of this paper is to study the impact of the bankruptcy law on financing, investment, default and liquidation decisions of firms. We build a model in which the firm has the opportunity to get into debt to finance an investment whose return is stochastic. Shareholders and bondholders bargain the amount of debt and the level of the coupon. Because of uncertainty, the firm may default. The firm manager takes investment and default decisions in order to maximize the value of equity. At default, the firm enters an observation period after which it is decided whether it liquidates or goes on with production. The model is calibrated in order to reproduce French firms characteristics. We then study the effect on financing, investment, default and liquidation decisions of the firms, of changes in the representative parameters of the bankruptcy procedure.

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Stephanie Ben-Ishai: "Bankruptcy for the Poor?" (Abstract ID: 974779):

For two reasons, the conventional wisdom is that the poor are not heavy users of the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Developments in two areas may challenge the conventional view. Undoubtedly, credit is now widely available across the spectrum of income groups. Even a short-term, low-wage job can bring a credit card to the doorstep of the poor and the slogan no credit, no problem testifies to the availability of retail credit. In addition, we now know that poverty is often a temporary state for many Canadians, with many moving in and out of low-income. Accordingly, the judgment-proof state is not a permanent condition, but a temporary status for many. While this may be welcome news in some respects, it means that debts can be accumulated during periods of relative economic well-being only to go unpaid when a job ends or when hard times return. These developments suggest the possibility that some of those who are poor at any point in time are in fact in need of bankruptcy protection. They have debts that they are unable to pay and little likelihood of being able to repay in the near future.

We begin the paper by presenting evidence from the 1999 Survey of Financial Security on indebtedness among families in the lower income deciles. We then turn to the main question: should the Canadian bankruptcy process be more readily available to poor debtors. We draw on two sources to shed light on this question: a) a comparative analysis (considering England and Wales, the United States, Australia and New Zealand) and b) a series of semi-structured interviews with Canadian bankruptcy trustees and other insolvency professionals.

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Viral V. Acharya and Krishnamurthy Subramanian: "Bankruptcy Codes and Innovation" (Abstract ID: 971566):

Do legal institutions governing financial contracts affect the nature of real investments in the economy? We develop a simple model and provide evidence that the answer to this question is yes. We consider a levered firm's choice of investment between innovative and conservative technologies, on the one hand, and of financing between debt and equity, on the other. Bankruptcy code plays a central role in these choices by determining the outcome of the continuation game in case of financial distress. When the code is creditor-friendly, excessive liquidations cause the firm to shy away from innovation. In contrast, by promoting continuation upon failure, a debtor-friendly code induces greater innovation. This effect is robust to the firm's attempt to sustain innovation by reducing debt under creditor-friendly codes.

Employing patents as a proxy for innovation, we find support for the real as well as the financial implications of the model: (1) Technologically innovative industries exhibit greater intensity of patent creation and patent citation relative to other industries in countries with weaker creditor rights; (2) This difference of difference result is further confirmed by within-country analysis that exploits time-series changes in creditor rights, suggesting a causal effect of bankruptcy codes on innovation; and (3) Innovative industries undertake relatively less leverage compared to other industries when creditor rights are stronger. Finally, while overall financial development fosters innovation, strong creditor rights weaken this effect, especially for highly innovative industries.

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Vineet Agarwal and Richard Taffler: "Comparing the Performance of Market-Based and Accounting-Based Bankruptcy Prediction Models" (Abstract ID: 968252):

Recently developed corporate bankruptcy prediction models adopt a contingent-claims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime.

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Puliyur Sudarsanam, Mike Wright, and Jian Huang: "Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk" (Abstract ID: 967731):

Using a sample of 236 UK companies that went from public to private (PTP) company status during 1997 to 2005 and a control sample of similar firms not going private, we study, with logistic regression methodology, the impact of bankruptcy risk measured by their default probability, estimated using stock market data and option pricing models, on the going private decision. We also examine value gains to existing shareholders of target companies of PTP transactions. Fama-French 3 factor event study approach is used to estimate the abnormal returns around the announcement period. We find that going private companies have significantly higher default probability. They also have fewer growth opportunities, lower stock market valuation, poorer operating performance and larger pre-PTP management holding. These companies are usually small in size, suffer stock market neglect and are undervalued. Weak corporate governance factors increase the chances of going private. We report a cumulative abnormal return (CAR) of 15% for a 7 day announcement period for firms subject to going private. These returns are higher for target firms faced with higher bankruptcy risk suggesting a strong turnaround motivation for the PTP deal. Private equity firms sponsoring PTPs generate higher shareholder value gains when they acquire firms with poorer growth record, higher risk of bankruptcy and larger free cash flow suggesting they are not deterred by the risk of financial distress but consider it a value creating opportunity. High bankruptcy risk at going private increases the chance the target will end up in receivership.

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Arjana Brezigar Masten and Igor Master, "Comparison of Parametric, Semi-Parametric and Non-Parametric Methods in Bankruptcy Prediction" (Abstract ID: 967637):

This paper compares parametric, semi-parametric and non-parametric methods in prediction of bankruptcy. Special care is devoted to the effect of choice-based sampling. The choice of the sampling and estimation method lead to a similar trade off. Using choice-based sampling and logit model leads to minimization of risk exposure. Samples unbalanced across groups and Klein and Spady (1993) semi-parametric method allow for better overall prediction accuracy and thus profit maximization. Both the choice of sampling method and the choice of estimation method should be thus made conditional on an explicit objective function of the financial institution in assessing credit risk.

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Kotaro Inoue,Hideaki Kiyoshi Kato and Marc Bremer: "Corporate Restructuring in Japan: Who Monitors the Monitor?" (Abstract ID: 965595):

This is the first comprehensive study to empirically analyze the economics of private (out-of-court) debt restructurings of financially distressed Japanese companies spanning the period from the burst of the bubble economy of Japan in 1990 to the time when the excessive bad debt problems of major firms were recognized as resolved in March 2005 on the basis of the stock prices of more than 200 restructurings. In Japan the mechanism of corporate monitoring is not market based (shareholder and public bondholder based) but large-investor based (large stakeholder based)typically, banks and affiliated companies. These stakeholders are expected to efficiently resolve potential bankruptcy or collapse with better information resulting from their long-term relationship with the distressed firms. In contrast, however, this study finds that out-of-court restructurings led by banks or affiliated companies failed to gain the trust of the market because of their procrastinations in implementing fundamental solutions; and therefore, there is a need for third-party monitoring. Compared to the analysis of out-of-court settlements in the United States by Gilson et al. (1990), this study finds that agreements on out-of-court restructuring in Japan are attained more easily than in the United States. However, without third-party mediation, no fundamental changes can be expected from the restructurings. This forbearance by banks and affiliated companies in addressing the needs of distressed firms indicates the weakness of banks and affiliated companies in instituting discipline among themselves, thereby showing the importance of instituting a system to “monitor the monitor”.

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Domagoj Satjer: "Must Bankruptcy Administrators Be Corporate Undertakers? Creation and European Perspectives of Restructuring in Bankruptcy" (Abstract ID: 965367):

Eurostat (Statistical Office of the European Communities) regularly publishes death rates of enterprises as one of the business demography reports. Building upon this terminology and perceiving that bankruptcy most often indicates near death of a distressed company, we could say that bankruptcy administrators' work is often reduced to playing the role of a corporate undertaker.

However, there is an alternative in the form of restructuring, even though it is rarely practiced (both in Croatia and the European Union). In the five year period (2000-2005) only one in 677 bankruptcy cases in the largest Commercial Court in Croatia, in the capital of Zagreb, was closed by restructuring the debtor.

The EU has already tackled this subject and has presented two projects: ‘Stigma of failure and early warning tools', and 'Restructuring, bankruptcy and a fresh start', with the aim (among others) of promoting restructuring.

In order to obtain deeper insights into problems and possible solutions in the area of bankruptcy and restructuring in Croatia, a wide survey of key bankruptcy issues was performed. Difficulties are identified, and many suggestions and recommendations for dealing with the problems are given. Our findings could be of use for many transition countries.

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Beng Tat Lee: "Claiming a Pound of Flesh as a Contingent or Prospectives Creditor Under the Companies Act" (Abstract ID: 965259):

 This article examines the concepts of a “contingent” creditor and a “prospective” creditor in the Companies Act and the Companies (Winding Up) Rules 1969 in the light of existing case authority. In the process it attempts to define the outer boundaries of these concepts. Some practical considerations and problems in making a claim against a company as a contingent or prospective creditor are also examined. Particular attention is paid to the problem of proving non-contractual claims for unliquidated damages in the winding up of an insolvent company.

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J. Efrim Boritz, Duane B. Kennedy and Jerry Y. Sun: "Predicting Business Failures in Canada" (Abstract ID: 963767):

Empirical researchers and practitioners frequently use the bankruptcy prediction models developed by Altman (1968) and Ohlson (1980). This poses a potential problem for practitioners in Canada and researchers working with Canadian data as the Altman and Ohlson models were developed using US data. We compare Canadian bankruptcy prediction models developed by Springate (1978), Altman and Levallee (1980), and Legault and Veronneau (1986) against the Altman and Ohlson models using recent data to determine the robustness of all models over time and the applicability of the Altman and Ohlson models to the Canadian environment.

Our results indicate that the models developed by Springate (1978) and Legault and Veronneau (1986) yield similar results to the Ohlson (1980) model while being simpler and requiring less data. The Altman (1968) and Altman and Levallee (1980) models generally have lower performance than the other models. All models have stronger performance with the original coefficients than the re-estimated coefficients. Our results regarding the Altman and Ohlson models are consistent with Begley, Ming, and Watts (1996). They found that the original version of the Ohlson model is superior to the Altman model and is robust over time.

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Joseph A. McCahery: "Creditor Protection in a Cross-Border Context" (Abstract ID: 963348):

This comment focuses initially on the way in which cross-border mobility plays a central role in shaping creditor protection regimes across the European Union. We conclude with some preliminary observations about the European Insolvency Regulation and the potential impact of forum shopping on creditors and firms.

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Francesco Denozza: "Different Policies for Corporate Creditor Protection" (Abstract ID: 963345):

Rules on corporate creditor protection are asymmetric rules. Rules which could increase the welfare of one class of creditors could at the same time reduce the welfare of another class. Different classes of creditors often coincide with different social groups (unskilled workers, small trade creditors, etc.). As we do not have an universally accepted social welfare function, the results of the comparisons between gains and losses caused by each rule are, in terms of overall welfare (efficiency), indeterminate. In conclusion, the choice of the best system of creditor protection is not a matter of efficiency but of fairness and political judgments. From this viewpoint, many arguments can support the preference for a rule (the net system with its formal test) rather than a more flexible standard.

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Peter O. Mulbert: "A Synthetic View of Different Concepts of Creditor Protection, Or: A High-Level Framework for Corporate Creditor Protection" (Abstract ID: 963342):

Protection of corporate creditors has become an important topic within the European Union. At EU level, discussion has been sparked by widespread dissatisfaction with some very rigid and cumbersome provisions, and even with the whole concept of the Second Company Law Directive. At EU Member State level, three landmark decisions by the European Court of Justice - Centros, Uberseering, and Inspire Art - opened the way for an all-out competition between the different company forms provided for by national company laws. At both levels, albeit for different reasons, British company law - and in particular the absence of any legal capital in the private limited company - acts as the main driving force putting pressure on the concept of legal capital as enshrined in the Second Directive, which in turn was modeled on German company law notions.

The High Level Group of Company Law Experts provided the appropriate starting point for the present discussion by dealing not only with the raising and maintenance of capital, but by also taking up the wrongful trading remedy (s. 214 British Insolvency Act) and the equitable subordination remedy. This present article builds upon this broader approach, seeking to develop a conceptual framework for an efficient creditor protection regime within a purely national setting, i.e., leaving aside the additional problems created by pseudo-foreign companies and the impact of the provisions of the EU Treaty for the free movement of companies on national company laws.

Given the rich variety of creditor protection mechanisms within EU Member States, any attempt at developing even a high-level framework has to start by identifying the relevant risks against which creditors need protection and the required extent of such protection. Against this backdrop, any jurisdiction has to make a choice whether to rely mostly on creditor self-help or on mandatory protection rules. In principle, since all mechanisms for creditor self-help are inherently costly and fail to protect involuntary (tort) creditors and weak contractual creditors as effectively as they do strong contractual creditors, there is a case for mandatory protection rules. The article then goes on to review the different well-known mechanisms for mandatory creditor protection. In line with earlier findings and the criticism mostly from English scholars, the case for a German-style legal capital regime turns out to be weak, at best.

On the other hand, since shareholders' incentive to act to the detriment of creditors increases with the company becoming financially distressed, it is important to provide for mechanisms that will work to effectively control any opportunistic behavior on the shareholder's part. In this respect, equitable subordination of a shareholder's right as well as the wrongful trading remedy may serve important roles. The article concludes by taking a brief look at the resultant high-level framework for an efficient creditor protection regime.

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Horst Eidenmuller: "Trading in Times of Crisis: Formal Insolvency Proceedings, Workouts and the Incentives for Shareholders/Managers" (Abstract ID: 963337):

Conventional economic reasoning suggests that formal insolvency proceedings should commence once the greater of the going concern value or the liquidation value of a firm falls below the value of its liabilities. Since this test is difficult to apply in practice, an additional cash flow test is needed: formal insolvency proceedings should commence if a firm is not able to pay its due debts. Two factors complicate this analysis: risk-shifting incentives of shareholders/managers in the vicinity of insolvency and the (rapid) decline of a firm's going concern value once it approaches insolvency. The former problem should be addressed by a liability rule for wrongful trading. Based on a review of the current legal position in the United States, the United Kingdom and Germany, a uniform European rule is proposed that imposes liability on managers of insolvent companies for trading while they knew or should have known that insolvency was more probable than not, unless they can show that they took all reasonable steps to avoid insolvency. The decline of a firm's going concern value once it approaches insolvency provides all stakeholders with an incentive to try a workout to save as much of the going concern value as possible. However, workouts often fail in practice due to free-rider effects. Cooperation duties are proposed as a means to support workouts. Such duties should be triggered once a workout is initiated. It is suggested that bankruptcy rules, in general, and rules on the initiation of bankruptcy proceedings, in particular, should in principle be enabling rather than mandatory.

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Hanno Merkt: "Creditor Protection Through Mandatory Disclosure" (Abstract ID: 963327):

Creditor protection through mandatory disclosure since long is a highly debated issue among corporate lawyers. This paper considers whether the legal system should compel corporations to disclose information publicly in order to better protect its creditors. First, the paper elaborates on the various economic rationales of mandatory disclosure advanced by proponents of that approach. Second, it rehearses the theoretical framework of mandatory disclosure. Third, it gives a brief overview of the law on those mandatory disclosure requirements that primarily or at least in part aim at corporate creditor protection. Fourth, it outlines limitations of mandatory disclosure with respect to creditors and debtor companies. Fifth, it briefly surveys several important challenges to mandatory disclosure regulation with respect to materiality, standardization, comprehensibility and timeliness. And finally, this paper deals with various legislative options to enforce creditor-protective mandatory disclosure.

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© Steve Jakubowski 2007