Why Do Banks Ask for Collateral and Which Ones ?

This paper aims at testing empirically the three major theoretical reasons why banks resort to collateral: reduction of loan loss in the event of default, adverse selection, and moral hazard. This investigation is performed by testing whether the reasons vary according to the type of collateral. We use a unique dataset of bank loans granted to French distressed firms, which contains the full information on debt contract characteristics, including the cause of default, the type and the value of all collaterals. Our work suggests that information asymmetries are not of prime importance in the decision of the bank to secure a loan, as no type of collateral helps to solve adverse selection and moral hazard problems. The reduction of the loan loss and the observed-risk hypothesis may however explain the use of collateral.Collateral, Bank, Credit Risk.

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, Fresh Starts, and Judicial Practice

We explore the ways French judges respond to the possibility of discharging personal debts in exchange for liquidation of debtors’ assets. We present empirical results on the determinants of judicial selection between debtors whose debts are wiped out and those who have to reimburse them. We find that French judges tend to disqualify debtors with multiple creditors from debt discharge, and are sensitive to regional labor market conditions. These empirical results help us understand better how French personal bankruptcy laws perform compared to other national systems. Finally, our results serve to fill the gap between bankruptcy rules and judicial practice.Personal bankruptcy, over-indebtedness

La performance économique et financière des jeunes entreprises.

Nous étudions dans cet article deux questions : les jeunes entreprises présentent-elles des caractéristiques distinctes selon l'origine de la création et ces caractéristiques induisent-elles des performances économiques et financières différentes ? L'enrichissement du fichier SINE-94 par l'ajout de variables financières (fichier national SUSE) permet de répondre en partie à ces questions. Les caractéristiques intrinsèques des entreprises s'opposent selon qu'il s'agit de créations pures (solides et innovantes), de créations pures (modestes et conduites par des entrepreneurs peu expérimentés), de transformations d'entreprises déjà existantes et de taille importante ou de reprises d'entreprises relativement petites et fragiles. Cette identification des différents profils de création permet ensuite de dégager plusieurs évolutions remarquables de leurs ratios économiques et financiers. Premièrement, la rentabilité économique des jeunes entreprises est soutenue, y compris pour les petites créations ou les reprises qui se concentrent essentiellement dans des secteurs d'activité certes traditionnels mais rentables d'un point de vue économique. La performance et le risque financiers des entreprises opposent les grosses créations innovantes et les transformations aux autres modes de création. En particulier, cette population accroît régulièrement sa capacité de remboursement, témoignant ainsi d'une stratégie économique et financière maîtrisée, de sorte que la création peut être considérée ici comme un véritable outil de rationalisation du niveau des performances. Ces résultats contredisent par ailleurs l'idéee selon laquelle les jeunes entreprises créées seraient financièrement plus risquées, même si la structure de bilan et la position nette sur le crédit interentreprises dépendent fortement de l'origine de la création (en particulier, les petites créations et les reprises voient leurs besoins en fonds de roulement réduits par une activité commerciale faible). La contrainte que représente le financement d'une nouvelle activité se traduit enfin par la chute régulière de la dynamique industrielle. Ainsi, l'investissement est peu étalé dans le temps, de sorte que la question du renouvellement des équipements constitue un réel facteur de risque au cours des premières années d'activité.

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.

Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma?

We study the French dilemma associated with court administered resolution of corporate financial distress of firms, in which bankruptcy courts have to combine both social efficiency (maintaining employment) and ex post financial efficiency (determining the best issue for financial distress, proxied here by the global recovery rate). We discuss this dilemma empirically, using a large sample of decisions of French commercial courts concerning the future of bankrupt firms (reorganization, sale as a going concern or liquidation). Addressing this dilemma, we discuss the determinants of bankruptcy courts’ selection between rival offers in sales as a going concern. Finally, we evaluate the financial cost of the French pro debtor system through the recovery rates of various claimants. Our main results are: (1) French commercial courts actively work to protect employment by facilitating continuation and reducing the domino effects of bankruptcy. (2) the courts’ choice between rival buyout offers confirms that social considerations prevail in the arbitration of bankruptcy courts. (3) Continuations through reorganization plans generate the highest recovery rates for all classes of creditors. (4) Contrary to the expected trade-off between social and financial efficiency, courts also enact measures to increase debt recovery once continuation has been chosen. However, for sales, recovery rates are inhibited by asset illiquidity and/or by the courts’ attempt to promote a firm’s continuation through sales at a low price.Bankruptcy, Reorganization; Liquidation; Recovery rate.

Modifications de comportement précédant la défaillance d’entreprise : l’impact des cessions d’actifs sur la relation de crédit

Le processus de défaillance d’une entreprise, lorsqu’il résulte d’une dégradation de ses performances économiques est affecté par les règles de partage qui prendront place en cas de liquidation. Il existe notamment , en cas de dégradation continue des résultats, des incitations conduisant l’entreprise à réduire son potentiel de croissance, par cession prématurée des actifs, afin de préserver la confiance des partenaires. Ce type de comportement, en retardant le défaut de paiement, risque d’accroître l’insuffisance d’actif et, par voie de conséquence, réduire le taux de recouvrement des créances. Néanmoins, en cas de difficulté temporaires, la politique de cession prématurée des actifs peut constituer un outil stratégique efficace contre le refus de prêt. Les résultats d’une enquête menée auprès du Tribunal de commerce de Paris entre 1993 et 1995 (données de 1991) confirment l’existence de telles cessions d’actifs : en retardant le déclenchement de la procédure collective, elles constituent un obstacle au redressement des entreprises.

Can Bankruptcy Codes Create Value? Evidence from Creditors’ Recoveries in France, Germany, and the UK

The aim of this paper is to provide new evidence on the value-creation process taking place in bankruptcy procedures that belong to different legal systems (French civil law, German civil law, and common law): to do so, we assess to which extent the debtor’s value can be preserved under bankruptcy by analyzing the recovery rates in France, Germany, and the United Kingdom. We use a unique European sample of 900 corporate bankruptcy files that were manually collected in commercial courts on the period 1993-2005. We also contribute to the literature by considering the recovery rates on the various classes of claimants (senior claims, junior claims, and new money) for each bankruptcy procedure. Our main conclusions are: (a) France and Germany show quite similar global recovery rates which are greater than in the UK, (b) when controlling for the quality of assets at the beginning of the procedure and for the structure of claims, we observe that recovery rates are not significantly different between France and the UK, while they remain greater for German companies, (c) Germany has the greatest recovery rates for senior and junior creditors, (d) the reorganization procedure and the liquidation procedure leading to the highest global recovery rate are, respectively, the French continuation and the German liquidation.Bankruptcy, Recovery Rates.

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.

Mimétisme, erreurs d'anticipation de la demande et risque de défaillance des entreprises industrielles en France : un modèle économétrique à correction d'erreur

Imitation, Demand Expectation Errors and the Risk of Bankruptcy Among Industrial Firms in France: An Econometric Error Correction Model Régis Blazy Our study links up the main explanatory factors generally put forward by theoretical literature as being behind the involuntary bankruptcy process by focusing on the role played by the demand expectation errors made by firms. The theoretical analysis presented posits a more or less stable convergence mechanism for these expectations. The effect of demand expectation errors on the probability of bankruptcy is econometrically confirmed using INSEE's business surveys of the industrial sector from 1977 to 1994. Other variables describing the legal, demographic and financial circumstances of firms during this period are also analysed.Mimétisme, erreurs d'anticipation de la demande et risque de défaillance des entreprises industrielles en France : un modèle économétrique à correction d'erreur Régis Blazy Notre étude relie entre eux les principaux facteurs explicatifs du processus de défaillance involontaire généralement avancés par la littérature théorique, en privilégiant le rôle joué par les erreurs d'anticipation de la demande commises par les entreprises. L'analyse théorique présentée permet de mettre en évidence un mécanisme de convergence plus ou moins stable de ces anticipations. L'impact des erreurs d' anticipation de la demande sur la probabilité de défaillance des entreprises est confirmé économétriquement en utilisant les enquêtes d'activité menées par l'Insee sur le secteur industriel entre 1977 et 1994. D'autres variables, décrivant le contexte démographique et financier des entreprises sur cette période sont également analysées.Blazy Régis. Mimétisme, erreurs d'anticipation de la demande et risque de défaillance des entreprises industrielles en France : un modèle économétrique à correction d'erreur. In: Économie & prévision, n°125, 1996-4. pp. 1-18