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Measuring the ex-ante incentive effects of creditor control rights during bankruptcy reorganization

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  • Agrawal, Ashwini
  • González-Uribe, Juanita
  • Martínez-Correa, Jimmy

Abstract

A large theoretical literature studies the effects of creditor control during bankruptcy proceedings on firm outcomes. Empirical work in this area mainly examines reforms to creditor control rights during liquidation. In this paper, we use administrative microdata and exploit a legal reform in Denmark to provide the first causal estimates of creditor empowerment in reorganization-the complementary bankruptcy procedure to liquidation. We find that the Danish reform led to a sharp decline in liquidations. Although few insolvent firms make use of the new reorganization procedures, we show that solvent firms improved their financial management and increased employment and investment. The findings illustrate the empirical importance of reorganization rules on the incentives of stakeholders outside of bankruptcy.

Suggested Citation

  • Agrawal, Ashwini & González-Uribe, Juanita & Martínez-Correa, Jimmy, 2022. "Measuring the ex-ante incentive effects of creditor control rights during bankruptcy reorganization," Journal of Financial Economics, Elsevier, vol. 143(1), pages 381-408.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:1:p:381-408
    DOI: 10.1016/j.jfineco.2021.09.020
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    More about this item

    Keywords

    Bankruptcy; Reorganization; Liquidation; Creditors; Debtors;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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