Hostname: page-component-76fb5796d-x4r87 Total loading time: 0 Render date: 2024-04-26T22:46:59.427Z Has data issue: false hasContentIssue false
  • English
  • Français

Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations

Published online by Cambridge University Press:  27 March 2019

Jaka Cepec  and
Peter Grajzl
Jaka Cepec
Affiliation:
Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia
Peter Grajzl*
Affiliation:
Department of Economics, The Williams School of Commerce, Economics, and Politics, Washington and Lee University, Lexington, VA, USA and CESifo, Munich, Germany
*
*Corresponding author. Email: grajzlp@wlu.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the effectiveness of bankruptcy institutions at promoting socially efficient allocation of resources. Under the Slovenian simplified reorganization procedure, firms with rejected reorganization proposals are not automatically liquidated. This unique institutional feature facilitates an estimation of the extent of different types of filtering failures. Based on an ex-post conceptualization of firm viability, Type I errors (the acceptance of plans by non-viable firms) are more likely than Type II errors (the rejection of plans by viable firms) and the overall incidence of filtering failure is 27%. Based on an ex-ante conceptualization of firm viability, any given reduction in Type II errors would give rise to three times as many Type I errors. We contextualize our findings in the light of prior results in the literature, alternative mechanisms for insolvency resolution, and related bankruptcy reorganization schemes internationally where courts are awarded a comparatively more prominent role.

Keywords

Bankruptcy institutionsreorganizationfiltering failuremeasurementSlovenia
Type
Research Article
Information
Journal of Institutional Economics , Volume 15 , Issue 3 , June 2019 , pp. 553 - 567
Copyright
Copyright © Millennium Economics Ltd 2019 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aghion, P., Hart, O. D. and Moore, J. (1992), ‘The Economics of Bankruptcy Reform’, Journal of Law, Economics and Organization, 8(3): 523–46.Google Scholar
Aghion, P., Hart, O. D. and Moore, J. (1994), ‘The Economics of Bankruptcy Reform’, in Blanchard, O., Froot, K. and Sachs, J. (eds), Transition in Eastern Europe (Volume 2), Chicago, IL: University of Chicago Press, pp. 215–44.Google Scholar
Altman, E. I. and Hotchkiss, E. (2006), Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt (third edition), Hoboken, NJ: John Wiley.Google Scholar
Barniv, R., Agarwal, A. and Leach, R. (2002), ‘Predicting Bankruptcy Resolution’, Journal of Business Finance and Accounting, 29(3–4), 497–520.Google Scholar
Cepec, J., Grajzl, P. and Zajc, K. (2017), ‘Do Liquidation Trustee Characteristics Matter for Firm Liquidation Outcomes? Evidence from Slovenia’, Economic Systems, 41(4): 591–609.Google Scholar
Cirmizi, E., Klapper, L. and Uttamchandani, M. (2012), ‘The Challenges of Bankruptcy Reform’, World Bank Research Observer, 27(2): 185–203.Google Scholar
Couwenberg, O. (2001), ‘Survival Rates in Bankruptcy Systems: Overlooking the Evidence’, European Journal of Law and Economics, 12(3): 253–73.Google Scholar
Dimitrova-Grajzl, V., Grajzl, P., Sustersic, J. and Zajc, K. (2012), ‘Court Output, Judicial Staffing, and the Demand For Court Services: Evidence from Slovenian Courts of First Instance’, International Review of Law and Economics, 32(1): 19–29.Google Scholar
Fattah, L. A., Barthélémy, S., Levratto, N. and Trempont, B. (2016), ‘Post-reorganization Survival: A Semi-parametric and Non-parametric Analysis of Firm Characteristics’, EconomiX working paper 2016–22.Google Scholar
Fisher, T. C. G. and Martel, J. (2004), ‘Empirical Estimates of Filtering Failure in court-supervised Reorganization’, Journal of Empirical Legal Studies, 1(1): 143–64.Google Scholar
Hodgson, G. M. and Knudsen, T. (2006), ‘The Nature and Units of Social Selection’, Journal of Evolutionary Economics, 16(5): 477–89.Google Scholar
Hotchkiss, E. S. (1995), ‘Postbankruptcy Performance and Management Turnover’, Journal of Finance, 50(1): 3–21.Google Scholar
Lazear, E. P. and Gibbs, M. (2009), Personnel Economics in Practice (second edition), Hoboken, NJ: John Wiley and Sons.Google Scholar
LoPucki, L. M. and Doherty, J. W. (2015), ‘Bankruptcy Survival’, UCLA Law Review, 62(4): 970–1015.Google Scholar
Moulton, W. N. and Thomas, H. (1993), ‘Bankruptcy as a Deliberate Strategy: Theoretical Considerations and Empirical Evidence’, Strategic Management Journal, 14(2): 125–35.Google Scholar
Nooteboom, B. (1994), ‘Innovation and Diffusion in Small Firms: Theory and Evidence’, Small Business Economics, 6(5): 327–47.Google Scholar
Perri, T. (2018), ‘Economics of Evaluation (with Special Reference to Promotion and Tenure Committees)’, Economics of Governance, 19(1): 1–19.Google Scholar
Posner, R. A. (1993), ‘What Do Judges and Justices Maximize? (The Same Thing Everybody Else Does)’, Supreme Court Economic Review, 3, 1–41.Google Scholar
Posner, R. A. (2007), Economic Analysis of Law, New York, NY: Aspen Publishers.Google Scholar
Rasmussen, R. K. and Skeel, D. A. Jr (1995), ‘The Economic Analysis of Corporate Bankruptcy Law’, American Bankruptcy Institute Law Review, 3(1): 85–116.Google Scholar
Robinson, J. A. (2013), ‘Measuring Institutions in the Trobriand Islands: A Comment on Voigt's Paper’, Journal of Institutional Economics, 9(1): 27–29.Google Scholar
Sah, R. K. and Stiglitz, J. E. (1986), ‘The Architecture of Economic Systems: Hierarchies and Polyarchies’, American Economic Review, 76(4): 716–27.Google Scholar
Shavell, S. (1995), ‘The Appeals Process as a Means of Error Correction’, Journal of Legal Studies, 24(2): 379–426.Google Scholar
Shirley, M. M. (2013), ‘Measuring Institutions: How To Be Precise though Vague’, Journal of Institutional Economics, 9(1): 31–33.Google Scholar
Voigt, S. (2013), ‘How (Not) to Measure Institutions’, Journal of Institutional Economics, 9(1): 1–26.Google Scholar
White, M. J. (1989), ‘The Corporate Bankruptcy Decision’, Journal of Economic Perspectives, 3(2): 129–51.Google Scholar
White, M. J. (1994), ‘Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-court Debt Restructurings’, Journal of Law, Economics, and Organization, 10(2): 268–95.Google Scholar