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What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data

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  • Fabrice Barthélémy

    (Université de Cergy-Pontoise (Théma))

  • Timothy C.G. Fisher

    (Wilfrid Laurier University and University of Sydney)

  • Jocelyn Martel

    (Université de Cergy-Pontoise (Théma) and ESSEC Business School)

Abstract

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in the unsecured creditors' reorganization decision. Using (HARA) utility functions, we find the implicit monthly discount rate of creditors to be 4.9%, which corresponds to an annual discount rate of 77%. This is 7 to 10 times higher than discount rates used in previous empirical studies of reorganization. The discount rate estimates are robust to varying degrees of risk aversion and market to book value ratio of assets.

Suggested Citation

  • Fabrice Barthélémy & Timothy C.G. Fisher & Jocelyn Martel, 2006. "What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data," THEMA Working Papers 2006-19, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2006-19
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    References listed on IDEAS

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    9. F. Barthelemy & T. C.G. Fisher & J. Martel, 2004. "Estimates of Creditors' Discount Rates in Court-Supervised Reorganisation Decisions," THEMA Working Papers 2004-16, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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    Cited by:

    1. Cepec, Jaka & Grajzl, Peter, 2020. "Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival," International Review of Law and Economics, Elsevier, vol. 61(C).

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