How well does bankruptcy work when large financial frms fail? Some lessons from Lehman Brothers

There is disagreement about whether large and complex financial institutions should be allowed to use U.S. bankruptcy law to reorganize when they get into financial difficulty. We look at the Lehman example for lessons about whether bankruptcy law might be a better alternative to bailouts or to resolution under the Dodd-Frank Act’s orderly liquidation authority. We find that there is no clear evidence that bankruptcy law is insufficient to handle the resolution of large complex financial firms.Bankruptcy ; Financial risk management

Bankruptcy Law: a Mechanism of Governance for Financially Distressed Firms.

This paper explores the various governance models for financially distressed firms. We offer a new typology of major bankruptcy models and provide a connection between this bankruptcy law puzzle and the variables depicting the governance of healthy firms in order to shed light on two topics: (1) the factors that the lawyer should consider before removing its national bankruptcy law, and (2) the risks associated with each bankruptcy model according to the economic literature on bankruptcy law. Our final aim is to test whether the various bankruptcy models detailed in the paper perform in separate economic and legal environments.Bankruptcy, Governance, Law and Economics.

Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"

A personal bankruptcy law that allows for a "fresh start" after bankruptcy reduces the individual risk involved in entrepreneurial activity. On the other hand, as risk shifts to creditors who recover less of their credit after a debtor's bankruptcy, lenders may charge higher interest rates or ration credit supply, which can hamper entrepreneurship. Both aspects of a more forgiving personal bankruptcy law are less relevant for wealthy potential. - entrepreneurs who still risk losing their wealth, but tend not to face higher interest rates because they provide collateral. This paper illustrates these effects in a model and tests the hypotheses derived by exploiting the introduction of a "fresh start" policy in Germany in 1999 as a natural experiment, based on representative household panel data. The results indicate that the insurance effect of a more forgiving personal bankruptcy law exceeds the interest effect and on balance encourages less wealthy individuals to enter into entrepreneurship.Personal bankruptcy law, insolvency, entrepreneurship, fresh start

Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"

A personal bankruptcy law that allows for a "fresh start" after bankruptcy reduces the individual risk involved in entrepreneurial activity. On the other hand, as risk shifts to creditors who recover less of their credit after a debtor's bankruptcy, lenders may charge higher interest rates or ration credit supply, which can hamper entrepreneurship. Both aspects of a more forgiving personal bankruptcy law are less relevant for wealthy potential entrepreneurs who still risk losing their wealth, but tend not to face higher interest rates because they provide collateral. This paper illustrates these effects in a model and tests the hypotheses derived by exploiting the introduction of a "fresh start" policy in Germany in 1999 as a natural experiment, based on representative household panel data. The results indicate that the insurance effect of a more forgiving personal bankruptcy law exceeds the interest effect and on balance encourages less wealthy individuals to enter into entrepreneurship.Personal bankruptcy law, insolvency, entrepreneurship, fresh start

Entrepreneurship and the Barrier to Exit: How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?

Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.

Personal Bankruptcy Law, Wealth and Entrepreneurship: Theory and Evidence from the Introduction of a "Fresh Start"

A personal bankruptcy law that allows for a "fresh start" after bankruptcy reduces the individual risk involved in entrepreneurial activity. On the other hand, as risk shifts to creditors who recover less of their credit after a debtor's bankruptcy, lenders may charge higher interest rates or ration credit supply, which can hamper entrepreneurship. Both aspects of a more forgiving personal bankruptcy law are less relevant for wealthy potential entrepreneurs who still risk losing their wealth, but tend not to face higher interest rates because they provide collateral. This paper illustrates these effects in a model and tests the hypotheses derived by exploiting the introduction of a "fresh start" policy in Germany in 1999 as a natural experiment, based on representative household panel data. The results indicate that the insurance effect of a more forgiving personal bankruptcy law exceeds the interest effect and on balance encourages less wealthy individuals to enter into entrepreneurship.personal bankruptcy law, insolvency, entrepreneurship, fresh start

Does the law alone explain the rise in bankruptcies in XIXth century France?

This paper is the first result of a project aiming at understanding the history of bankruptcy law from an empirical economic perspective. By contrast with some proponents of "law and economics" (e.g. La Porta & alii, 1998), we consider that the impact of bankruptcy law on national economic performance cannot be deducted a priori from a simple description of the law, but can only be measured examining actual court practices and economic agents' behaviour. First of all, we believe that an empirical assessment of bankruptcy must start with a better understanding of what determines the proportions of debtor-creditors relationships which end-up in court (contrasting with those settled outside the courts, see Klapper, 2001). This simple question, which is not usually discussed, is a precondition for any interpretation of aggregate bankruptcy statistics. In this paper, we try to measure the impact of the changes in French bankruptcy law in the XIXth century focusing on the behaviour of economic agents as users of bankruptcy law for the sake of finding the best solution to their economic problems. Debtors used bankruptcy law in order to minimize their debt level when facing difficulties in servicing it, but they had to convince their creditors and/or the courts of their good faith, and faced the adverse effects of bankruptcy on their reputation and on the smooth functioning of their business. Creditors used bankruptcy law in order to force their debtors to pay, if they could. We use a new and still incomplete database constructed using both the yearly official statistics produced by the judicial system from 1830 on, and individual bankruptcy files from the Paris commercial court (Tribunal de commerce) archives in order to measure actual practices. The first part of the paper presents the evolution of French bankruptcy law during the XIXth century in its historical context. The second part briefly describes the theoretical model we use in order to understand the choices facing debtors and creditors in the face of financial distress. The last part proposes some major stylized facts concerning bankruptcies during that period and tries to understand their relationship with the legal evolution described before.history ; business law ; bankruptcy ; credit ; small and medium businesses ; commercial courts ; financial distress ; private settlement ; France ; 19th century ; code de commerce

Bankruptcy law and practice in 19th century France

In this paper, we try to measure the impact of the changes in French bankruptcy law in the 19th century focusing on the behaviour of economic agents as users of bankruptcy law for the sake of finding the best solution to their economic problems. Debtors used bankruptcy law in order to minimize their debt level when facing difficulties in servicing it, but they had to convince their creditors and/or the courts of their good faith, and faced the adverse effects of bankruptcy on their reputation and on the smooth functioning of their business. Creditors used bankruptcy law in order to force their debtors to pay, if they could. Judges - who in the French system of specialized commercial courts were elected entrepreneurs - applied the law within a specific economic context (both a specific local context and at a specific moment in the business cycle) which could affect them. The first part of the paper presents the evolution of French bankruptcy law during the 19th century in its historical context. The second part briefly describes the theoretical model we use in order to understand the choices facing debtors and creditors in the face of financial distress. The last part proposes some major stylized facts concerning bankruptcies during that period (based on contemporary official statistics) and tries to understand their relationship with the legal evolution described before.bankruptcy law ; failure ; firm size ; law implementation ; legal origin ; merchant courts ; France ; 19th century

Bankruptcy Law and Entrepreneurship

Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, little attention has been paid to the question empirically. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 13 years (1990-2002) and 15 countries in Europe and North America. We compile a new index of the level of how ‘forgiving’ personal bankruptcy laws are, reflecting the time to discharge. This measure varies over time and across the countries studied. We show that bankruptcy law has a more statistically and economically significant effect on self employment rates relative to GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.Personal Bankruptcy Law, Entrepreneurship

Insolvency laws around the world - a statistical analysis and rules for their design

Insolvenzrecht, Welt, Konkurs, Bankruptcy law, World, Bankruptcy