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

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  • Fabrice Barthélémy

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Timothy Fisher

    (The University of Sydney)

  • Jocelyn Martel

    (ESSEC Business School)

Abstract

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in theunsecured 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 a range of assumptions about the degree of risk aversion and the market-to-book-value ratio of assets.

Suggested Citation

  • Fabrice Barthélémy & Timothy Fisher & Jocelyn Martel, 2009. "What Discount Rate Should Bankruptcy Judges Use? Estimate from Canadian Reorganization Data," Post-Print hal-00707413, HAL.
    • Handle: RePEc:hal:journl:hal-00707413
    Note: View the original document on HAL open archive server: https://hal.science/hal-00707413
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    References listed on IDEAS

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    1. Fisher, Timothy C G & Martel, Jocelyn, 1999. "Should We Abolish Chapter 11? Evidence from Canada," The Journal of Legal Studies, University of Chicago Press, vol. 28(1), pages 233-257, January.
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    3. 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.
    4. Timothy C.G. Fisher & Jocelyn Martel, 2004. "Empirical Estimates of Filtering Failure in Court‐Supervised Reorganization," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 1(1), pages 143-164, March.
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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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