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Bankruptcy and Resolution of Financial Distress

The recent financial crises in many emerging markets have drawn attention to the importance of efficient mechanisms to resolve the financial distress of corporations. While it is clear that bankruptcy protection can be an important mechanism to resolve financial distress, it not well understood how often bankruptcy is actually being used in countries around the world or why its usage varies by country. It is apparent, however, that country and institutional characteristics will affect the way that financial institutions and commercial creditors confront financial distress.

These differences include variations in legal systems, accounting standards, and regulatory frameworks, as well as differences in the development of financial and capital markets, and macroeconomic factors. In addition, we expect that firm-level characteristics – including performance, leverage, and ownership – affect the resolution of financial distress. For example, possible outcomes for firms in distress may include out-of-court renegotiations, acquisitions by healthy firms, or in-court reorganizations or liquidations. The following papers address these questions using both country- and firm-level datasets of firms in financial distress.

For instance, the following plot shows country-average values of the CLSA firm-level governance index plotted against the legality index. The relationship is strongly positive, indicating that countries with better legal systems have on average higher firm-level governance.

(Please click the graph to view a larger image)

The following plot shows the number of bankruptcies as a percentage of total bankruptcies in countries around the world. These differences can be explained by variations.

(Please click the graph to view a larger image)

Researchers
  • Leora Klapper

Documents
You can also download other related documents. These include content-rich current outputs (updated document versions, miscellaneous documents and web pages).

Library

WPS5448The challenges of bankruptcy reformCirmizi, Elena; Klapper, Leora; Uttamchandani, Mahesh2010/10
WPS3970Do reorganization costs matter for efficiency ? Evidence from a bankruptcy reform in ColombiaGine, Xavier; Love, Inessa2006/07
WPS3719Cross-country empirical studies of systemic bank distress : a surveyDemirguc-Kunt, Asli; Detragiache, Enrica2005/09
WPS2865Bankruptcy around the world - explanations of its relative useClaessens, Stijn; Klapper, Leora F.2002/07
WPS2133Resolution of corporate distress - evidence from East Asia's financial crisisClaessens, Stijn; Djankov, Simeon; Klapper, Leora1999/06



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