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Too much of a good thing? The impact of a new bankruptcy law in Canada

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  • Timothy C.G. Fisher
  • Jocelyn Martel

Abstract

A new, more debtor-friendly bankruptcy law in Canada is associated with a tenfold increase in the proportion of insolvent firms choosing reorganization over liquidation. Comparing before-and-after samples of randomly-selected firms, we find that firms reorganizing under the new law are smaller and weaker with a capital structure exhibiting significantly higher tax claims. Reflecting the bargaining power shift towards debtors, we find the new law is also associated with 25% lower creditor recovery rates and a longer time in reorganization. Unintended effects of the new law include a possible increased government role in financing small businesses and an incentive for secured creditors to favour bankruptcy over other forms of distress resolution.

Suggested Citation

  • Timothy C.G. Fisher & Jocelyn Martel, 2015. "Too much of a good thing? The impact of a new bankruptcy law in Canada," Finance, Presses universitaires de Grenoble, vol. 36(2), pages 37-66.
    • Handle: RePEc:cai:finpug:fina_362_0037
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    Cited by:

    1. Fisher, Timothy C.G. & Martel, Jocelyn & Gavious, Ilanit, 2016. "Tax claims, government priority, absolute priority and the resolution of financial distress," International Review of Law and Economics, Elsevier, vol. 48(C), pages 50-58.
    2. Régis Blazy & Nicolae Stef, 2020. "Bankruptcy procedures in the post-transition economies," European Journal of Law and Economics, Springer, vol. 50(1), pages 7-64, August.

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