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Do reorganization costs matter for efficiency ? Evidence from a bankruptcy reform in Colombia
 
Author:Gine, Xavier; Love, Inessa; Collection Title:Policy, Research working paper ; no. WPS 3970
Country:Colombia; Date Stored:2006/07/20
Document Date:2006/07/01Document Type:Policy Research Working Paper
SubTopics:Small Scale Enterprise; Economic Theory & Research; Banks & Banking Reform; Microfinance; Corporate LawLanguage:English
Region:Latin America & CaribbeanReport Number:WPS3970
Volume No:1 of 1  

Summary: The authors study the effect of reorganization costs on the efficiency of bankruptcy laws. They develop a simple model that predicts that in a regime with high costs, the law fails to achieve the efficient outcome of liquidating unviable businesses and reorganizing viable ones. The authors test the model using the Colombian bankruptcy reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, they find that the pre-reform reorganization proceeding was so inefficient that it failed to separate economically viable firms from inefficient ones. In contrast, by substantially lowering reorganization costs, the reform improved the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.

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