Working Paper: CEPR ID: DP5035
Authors: Julian R. Franks; Gyngyi Lrnth
Abstract: This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency.
Keywords: allocation of control rights; bankruptcy code; compensation; recovery rates
JEL Codes: G21; G30; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| court procedures (K41) | going concern bias (G32) |
| type of trustee (G23) | incidence of inefficiencies (D61) |
| owner or trade creditor-initiated bankruptcies (G33) | higher operating losses (G32) |
| going concerns in bankruptcy (G33) | loss for prebankruptcy creditors (G33) |
| trustee's remuneration scheme (M52) | incidence of inefficient going concerns (G33) |