Do Reorganization Costs Matter for Efficiency?: Evidence from a Bankruptcy Reform in Colombia
World Bank, Development Research Group, Finance Team, 2006 - Bankruptcy - 42 pages
"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."--World Bank web site.
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assets1 assumption bank bankrupt and active bankrupt firms bankruptcy laws bankruptcy system Bris cash-flow at date coefficient Concordato creditors debtor dependent variables distressed firm distribution of cash-flows dummy Duration of Reorganization economically viable firms efficiency expected net cash-flow expected reorganization costs filing for liquidation filing for reorganization financial data financial health firms filing firms that filed hazard ratios Hypothesis B1 inefficient interactions June 2006 June law was introduced length of reorganization liquidate or reorganize liquidation values lower macroeconomic macroeconomic conditions mandatory liquidation matched active firms matched sample mean tests measure number of firms number of reorganizations observed cash-flow old law Panel payoff to reorganization Postrend pre-filing Pretrend proportional hazard model ratios RE_TA Z-score Recovery after Reorganization Regression analysis reorganization plan reorganization proceeding reorganized firms restructure retained earnings return on assets sample of active Section Selection into Reorganization Superintendence of Companies Table 1A total assets total number World Bank