Building Legal Indexes to explain Recovery Rates: An Analysis of the French and UK Bankruptcy Codes

The main aim of this paper is to find the legal characteristics that impact on the recovery rates. Previous studies (LLSV, Doing Business Report, World Bank) have usefully used a set of legal indexes to rank the bankruptcy law prevalent within the country. But they fail to identify the characteristics of bankruptcy procedures that create more recoveries. We give here elements of answer by taking into consideration two countries that are good representatives of the two main legal systems prevailing in Europe: France (Civil Law) and United Kingdom (Common Law). To enable this, we built original legal indexes comprising of 158 binary questions that highlight ten major dimensions of corporate bankruptcy procedures: (1) accessibility, (2) exclusivity, (3) bankruptcy costs, (4) production of information, (5) protection of the debtor’s assets, (6) protection of claims, (7) coordination of creditors, (8) decision power, (9) sanction of faulty management, and (10) inclination towards liquidation / reorganization. We then propose a mapping of procedures that shows a clear specialization between them. The French procedures (“redressement judiciaire” and “liquidation judiciaire”) are more protective of the debtor’s assets and favor more the coordination of secured claims, public claims, and unsecured claims. In UK, we find strong opposition between the procedures oriented to liquidation and the other procedures. We then use an original database of 833 French and UK bankruptcy files to measure the recovery rates that are generated by each procedure. We find strong differences be tween them. We then turn to OLS regressions and use our legal indexes to isolate the characteristics of bankruptcy law that significantly impact on the total recovery rate. By controlling for the value of assets, the structure of claims, the origins of default, and the firm characteristics, we test for several hypotheses. We first isolate the legal features of bankruptcy procedures that are associated to higher total recovery rates: namely, accessibility of the procedure, protection of the debtor’s assets, protection and coordination of claims, orientation towards reorganization, and bankruptcy costs. From that perspective, these costs are not sunk cost only, but can be viewed as the counterpart of a service provided by the practitioners that eventually serve the creditors’ recoveries. On the contrary, we find that the production of information under bankruptcy has a negative impact on total recoveries, probably due to the breach in confidentiality. Last, some dimensions of corporate bankruptcy law are not significantly related to total recovery rates (inclination towards liquidation, severity towards faulty management).Bankruptcy laws, recovery rates, legal indexes.

Arbitrating between Renegotiation and Bankruptcy: The Case of French Banks Facing Distressed SMEs

This empirical paper investigates the determinants of the arbitration taking place after a corporate default. Two ways of resolving financial distress are conceivable: either the creditors privately renegotiate with the debtor, or a formal bankruptcy procedure is triggered off. This arbitration depends on the legal context and, more specifically, on the national bankruptcy code. No study has been done on the French Civil Law. Yet, this legal system has inspired other important legislations in continental Europe. We use original data coming from the recovery units of five French commercial banks. Our sample gathers 735 credit lines allocated to 386 distressed companies (233 of them are used in our econometric regressions). Our variables encompass the profile of the company, the origin of the default (with a specific focus on faulty management), the nature of the credit relationship, and the type of borrowings. We test four hypotheses. Hypothesis H1 focuses on a tradeoff between the arguments based on coordination issues and the counterarguments based on the stakeholders’ bargaining power. Such tradeoff may depend on the legal environment. Hypothesis H2 suggests that, to support renegotiation, a bank needs information on the project’s profitability (adverse selection), and on the managers’ reliability (moral hazard). To reach an agreement, the bank must believe both conditions prevail. Hypothesis H3 predicts the likelihood of renegotiation increases with the bank’s financial involvement (size effect). Hypothesis H4 focuses on the level of collateralization (when the bank has inclination for liquidation, collaterals may increase the occurrence of bankruptcy, provided the law facilitates such liquidation and protects the bank’s priority on junior claims). To test H1 to H4, we use sequential LOGIT modeling to split between the variables explaining the decision to engage (or not) renegotiation and the variables explaining the success (or the failure) of renegotiation. Regarding H1, we find the “coordination argument” is of secondary importance compared to the “bargaining power counterargument”. Indeed, whatever the coordination issues, a major bank may not wish to renegotiate simply because the competition with the other minor creditors is expected to be weak under bankruptcy, and/or because the debtor cannot survive without the bank’s financial support. Consequently, even a court-administered procedure (as in France) may not have dissuasive effects provided the bank’s bargaining power is strong enough. Regarding H2, we show the project profitability and the managers’ reliability are two essential conditions to escape bankruptcy, but it needs time to discover them. Consequently, the first step of the arbitration (i.e. renegotiation attempt vs. direct bankruptcy ) does not depend on these conditions. Regarding H3, our results suggest that, when the lending is bigger and/or when the debt contract is longer, the chance of undertaking renegotiation is higher, but this does not predict such renegotiation shall be successful. Last, regarding H4, we do not find any evidence that the level of collateralization significantly influence the tradeoff between informal renegotiation and formal bankruptcy. Indeed, in France, liquidation is viewed as a secondary objective, and the social claims outrank the secured ones.Bankruptcy, Renegotiation, Banks, SME, Sequential LOGIT.

Digital Startup Access to Venture Capital Financing: What Signals Quality?

Acknowledgements We are grateful to anonymous reviewers and editors for their comments, suggestions that helped us to improve the quality of paper immensely. Thanks to University of Lorraine and Prof. Jean-Noel Ory and Prof. Vincent Braun for financing this project with University grant. We are also thankful to ICN Artem Business School for allowing us to present the paper in International conferences. We are also thankful to participants of internal and external seminars for their useful comments and suggestions. Lastly, we are thankful to Arnesh Bose for helping us in collecting data manually. Rest all errors and oversights are ours alone.Peer reviewedPostprin

Essays on corporate default process: UK and France

The thesis has been conducted upon a unique and primary database manually collected through courts and various reliable sources (governmental and non-governmental offices). This is the major strength of this thesis. With such a database, we built individual statistics on the corporate bankruptcies process in for two major European countries (France and United Kingdom). The collected data deals with the causes of financial default, the recovery rates of creditors, the process of decision making at the time of default, the efficiency of such decisions, etc. Such research project helps in distinguishing the origins of corporate financial default: are they independent from the national bankruptcy code or not? In order to test the effect of legal environment, we computed the most comprehensive legal indexes till date. Our legal indexes consist of more than 300 questions that explain the particular function of bankruptcy. We merge these indexes with the hand collected database for France and UK. This makes this thesis really unique as it is composed of original hand collected databases. To the best of our knowledge the UK database has no equivalence as for the first time we manage to include liquidations which constitute more than 85% of bankruptcies in UK. Even the scholars in UK lack such information. Such empirical work is completed by a microeconomic theoretical analysis and would yield interesting results that will be discussed in detail in the rest of the chapters of the thesis and also open avenues for future research work. Chapter 1 presents a brief introduction to the topic, explaining the research aims and research methodology. Chapter 2 presents the detailed survey of literature on bankruptcy. It starts by explaining the basic concept associated with bankruptcy, need of bankruptcy laws, the main objective of bankruptcy, the main processes associated with bankruptcy, classification of bankruptcy regimes and the law and finance approach to understand legal environment affecting bankruptcy. It explores the previous literature and findings and provides our contribution to the pre-existing literature and justifies our research goals and our approach. Chapter 3 empirically investigates the choice between informal and formal (court-supervised) restructuring of small and medium French firms in default. The procedure is depicted as a sequential game in which stakeholders first decide whether or not to engage in an informal negotiation. Then, conditional on opting for an informal workout, the creditors and the debtor can succeed or fail in reaching an agreement in order to restructure the firm’s capital structure. Based on a sample of 735 credit lines allocated to 386 French distressed firms, we test different hypotheses which captures i) coordination vs. bargaining power issues, ii) informational problems, iii) firms’ characteristics, and iv) loan characteristics. Using a sequential LOGIT approach, we first find that the probability for opting for an informal workout i) decreases when the bank is the debtor’s main creditor and ii) increases with the size of the loan. In addition, the likelihood of success of an informal workout i) decreases when the management of a badly rated firm is considered as incompetent, and ii) decreases when the bank is the debtor’s main creditor. The result concerning the bank as being the main creditor suggests that “bargaining power” argument dominates the “coordination” argument. Finally, we find no evidence of the impact of collateral on the decision between informal and formal restructuring. Chapter 4 describes the prevalent bankruptcy procedure of UK and France; in general it provides an entire macro view of the bankruptcy laws in given two countries. It presents the various formal and informal procedures, explains their functioning, how they are triggered and the underlying specificities about each process. It is very crucial to understand the working of each procedure as this forms the basis for the future chapters where we related the result of our summary statistics and econometrics to specificities of these procedure and come up with useful conclusions and insights. In chapter 5 the focus returns to the micro economic analysis. We explore the two unique hand coded databases, collected through different sources. Our database consists of 264 small and medium sized enterprises representing France and 564 small and medium sized enterprises representing UK. These countries represent two major legal systems prevailing in Europe: common law and civil law. Both legislations have features that are of interest for research. Based on are datasets we provide summary statistics on both the countries. Our descriptive statistics explains the average profile of our sample company, it provides us with the reasons that lead the company into bankruptcy, it provides us the detailed asset and liability structures of the firms and the detailed claim structure and recovery structure. In addition it also provides us with the duration of the procedure and the costs involved in the process. We also perform multivariate analysis to test the choice between continuation and liquidation for France and to test the factors that increase or decrease the chances of receivership (procedure made for the benefits of banks) and administration (regarded as reorganization procedure) in UK. The main aim of the chapter 6 is to find the legal characteristics that impact on the recovery rates. Previous studies (LLSV, Doing Business Report, World Bank) have usefully used a set of legal indexes to rank the bankruptcy law prevalent within the country. But they fail to identify the characteristics of bankruptcy procedures that create more recoveries. We give here elements of answer by taking into consideration two countries that are good representatives of the two main legal systems prevailing in Europe: France (Civil Law) and United Kingdom (Common Law). To enable this, we built original legal indexes comprising of 158 binary questions that highlight ten major dimensions of corporate bankruptcy procedures: (1) accessibility, (2) exclusivity, (3) bankruptcy costs, (4) production of information, (5) protection of the debtor’s assets, (6) protection of claims, (7) coordination of creditors, (8) decision power, (9) sanction of faulty management, and (10) inclination towards liquidation / reorganization. We then propose a mapping of procedures that shows a clear specialization between them. The French procedures (“redressement judiciaire” and “liquidation judiciaire”) are more protective of the debtor’s assets and favor more the coordination of secured claims, public claims, and unsecured claims. In UK, we find strong opposition between the procedures oriented to liquidation and the other procedures

Essais sur le processus de défaut des entreprises,les cas anglais et français

L'analyse du défaut des entreprises est essentielle en sciences de gestion. Elle permet notamment d'envisager l'entreprise comme un objet pluridisciplinaire, à la croisée du management, de l'économie, des sciences sociales et juridiques. En matière de gestion, la faillite est un moment clef de la vie de l'entreprise qui voit sa gouvernance interne et ses rapports avec les parties prenantes affectés. Il s'agit de restaurer la confiance, d'identifier les problèmes à l'origine du défaut et les restructurations nécessaires à la survie du projet d'entreprise. En matière économique, la faillite représente une sanction de marché permettant de réguler les mouvements d'entrées et de sorties des producteurs dans un environnement concurrentiel. En matière sociale, la défaillance implique la disparition de tout ou partie des employés et la rupture des contrats de travail, ainsi que la disparition du capital humain. D un point de vue juridique enfin, la défaillance revient à se tourner vers la solution judiciaire et traiter de manière collective les créanciers de l'entreprise. Tout en privilégiant une optique pluridisciplinaire, notre thèse s'inscrit avant tout dans une démarche financière dont l'objet d'analyse premier est la défaillance des entreprises, notamment des PME. Nous montrons notamment que les conséquences financières de la faillite (taux de recouvrement) ne sont pas indépendantes de l'environnement juridique des pays (droit de la faillite). Pour cela, nous utilisons des outils novateurs (construction d'indicateurs composites, économétrie qualitative et quantitative) et des données inédites, dont la plupart ont été collectées manuellement. Notre approche, enfin, s'inscrit dans une démarche internationale et européenne. Nous avons, dans cette perspective, concentré notre analyse sur deux pays d'Europe : la France et le Royaume-Uni. Cette thèse ambitionne donc de décrire le processus de défaut des entreprises dans deux pays représentatifs des deux principaux systèmes juridiques européens : pays de droit civil (France) et pays de droit commun (Royaume-Uni). La thèse rassemble plusieurs articles de recherche (certains ayant déjà été présentés en conférences internationales et actuellement sous forme de documents de travail).The thesis has been conducted upon two unique and primary databases manually collected through courts and various reliable sources (governmental and non-governmental offices). This is the major strength of this thesis. With such databases, we built individual statistics on the corporate bankruptcy process for two major European countries (France and United Kingdom). To the best of our knowledge, the UK database has no equivalence and we are the pioneers of including real world data on liquidations in our research database. For both countries, the collected data deals with the causes of financial default, the recovery rates of creditors, the process of decision making at the time of default, the efficiency of such decisions, etc. Such research project helps in distinguishing the origins of corporate financial default and in distinguishing whether they are independent of the national bankruptcy code or not. Additionally, we were actively involved in constructing new legal indexes for corporate bankruptcy law in France and UK. And it is notable that we succeeded in computing the most comprehensive legal indexes till date. These legal indexes consist of more than 300 questions that explain the particular function of bankruptcy. In order to empirically test the effect of legal environment on economic behaviors and financial outcomes, we consider these indexes as explanatory variables of the variables that were hand collected in France and UK. This makes this thesis unique as it is composed of original sources of information. The thesis is composed of several essays (chapters) on corporate bankruptcy. The general organization of these chapters tries to capture the default process, viewed as a sequential process beginning from the arbitration between private and formal solutions and progressing onto the formal design of the legal solution and finally concluding by explaining the financial effects of legal indexes on various creditors

China versus India: Emerging Giants in the World Economy

International audienceThe dawn of the 21st century witnessed a spectacular uprising of China and India as global market leaders. The effects of this phenomenon reverberated across the entire global economy and brought about a shift in the products markets, patterns of buying and selling, investment strategies, as well as natural resources and the environment. India and China have become epicenters of world economy due to their unprecedented economic growth, spanning across three decades. China has consistently registered high growth rates since 1980, whereas India has ranked amongst the top 10 fastest growing nations between 1980–1990 and 1990–2000. This unparalleled economic success is popularly attributed to, largely, the integration of these countries into the global economy. Without a doubt, both India and China are economies which hold great promise of becoming titans in the global economic panorama. The aim of the chapter is to provide knowledge about India and China and see how these economies have evolved to become two main giants and its implications. This knowledge will be essential for people to understand the investment climate in India and China and develop the basic foundation required for investing in these countries or for initiating any business opportunity

China versus India: Emerging Giants in the World Economy

International audienceThe dawn of the 21st century witnessed a spectacular uprising of China and India as global market leaders. The effects of this phenomenon reverberated across the entire global economy and brought about a shift in the products markets, patterns of buying and selling, investment strategies, as well as natural resources and the environment. India and China have become epicenters of world economy due to their unprecedented economic growth, spanning across three decades. China has consistently registered high growth rates since 1980, whereas India has ranked amongst the top 10 fastest growing nations between 1980–1990 and 1990–2000. This unparalleled economic success is popularly attributed to, largely, the integration of these countries into the global economy. Without a doubt, both India and China are economies which hold great promise of becoming titans in the global economic panorama. The aim of the chapter is to provide knowledge about India and China and see how these economies have evolved to become two main giants and its implications. This knowledge will be essential for people to understand the investment climate in India and China and develop the basic foundation required for investing in these countries or for initiating any business opportunity

Essais sur le processus de défaut des entreprises,les cas anglais et français

L'analyse du défaut des entreprises est essentielle en sciences de gestion. Elle permet notamment d'envisager l'entreprise comme un objet pluridisciplinaire, à la croisée du management, de l'économie, des sciences sociales et juridiques. En matière de gesThe thesis has been conducted upon two unique and primary databases manually collected through courts and various reliable sources (governmental and non-governmental offices). This is the major strength of this thesis. With such databases, we built indiv

Resolution of financial distress through creative and innovative methods

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TRANSFORMING INDIA DIGITALLY: Financing of young innovative startups from India

International audienc