IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/2004-fe-07.html
   My bibliography  Save this paper

Financial Distress, Bankruptcy Law and the Business Cycle

Author

Listed:
  • Oren Sussman
  • Javier Suarez

Abstract

This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ‘softens’ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust, or actively managing the interest rate across the cycle, could stabilize the economy in the long run. A comprehensive welfare analysis of the policy is provided as well.

Suggested Citation

  • Oren Sussman & Javier Suarez, 2004. "Financial Distress, Bankruptcy Law and the Business Cycle," Economics Series Working Papers 2004-FE-07, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2004-fe-07
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:c5c91318-3907-4e9b-ad82-47411b625a04
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    2. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    3. Suarez, Javier & Sussman, Oren, 1997. "Endogenous Cycles in a Stiglitz-Weiss Economy," Journal of Economic Theory, Elsevier, vol. 76(1), pages 47-71, September.
    4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    5. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    6. repec:bla:jfinan:v:53:y:1998:i:3:p:939-978 is not listed on IDEAS
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. Julian R. Franks & Kjell G. Nyborg & Walter N. Torous, 1996. "A Comparison of UK, US and German Insolvency Codes," Financial Management, Financial Management Association, vol. 25(3), Fall.
    9. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1997. "Optimal bankruptcy law and firm-specific investments," European Economic Review, Elsevier, vol. 41(3-5), pages 487-497, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Korkeamaki, Timo & Koskinen, Yrjo & Takalo, Tuomas, 2007. "Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis," Journal of Financial Stability, Elsevier, vol. 3(1), pages 33-58, April.
    2. Wai-Hong Ho, 2017. "Financial market globalization, nonconvergence and credit cycles," Annals of Finance, Springer, vol. 13(2), pages 153-180, May.
    3. Chiarella, Carl & Di Guilmi, Corrado, 2011. "The financial instability hypothesis: A stochastic microfoundation framework," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1151-1171, August.
    4. Yunan Li & Cheng Wang, 2022. "Endogenous Labor Market Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 849-881, May.
    5. Chiarella Carl & Di Guilmi Corrado, 2012. "The Fiscal Cost of Financial Instability," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-29, October.
    6. Charles Goodhart & Dimitrios Tsomocos, 2007. "Financial stability: theory and applications," Annals of Finance, Springer, vol. 3(1), pages 1-4, January.
    7. ben Jabeur, Sami & Mefteh-Wali, Salma & Carmona, Pedro, 2021. "The impact of institutional and macroeconomic conditions on aggregate business bankruptcy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 108-119.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anderson, Ronald W. & Nyborg, Kjell G., 2011. "Financing and corporate growth under repeated moral hazard," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 1-24, January.
    2. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    3. Guembel, Alexander & Sussman, Oren, 2010. "Liquidity, Contagion and Financial Crisis," IDEI Working Papers 664, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Ivashina, Victoria & Laeven, Luc & Moral-Benito, Enrique, 2022. "Loan types and the bank lending channel," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 171-187.
    5. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    6. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    7. Guembel, Alexander & Sussman, Oren, 2014. "A Welfare Analysis of Fragmented Liquidity Markets," IDEI Working Papers 832, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Alexander Guembel & Oren Sussman, 2020. "The Pecking Order of Segmentation and Liquidity-Injection Policies in a Model of Contagious Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1296-1330.
    9. Bruno Biais & Thomas Mariotti, 2009. "Credit, Wages, and Bankruptcy Laws," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 939-973, September.
    10. Kenneth Kasa, 1998. "Borrowing constraints and asset market dynamics: evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 17-28.
    11. Eckbo, B Espen & Thorburn, Karin S, 2002. "Overbidding versus Fire-Sales in Bankruptcy Auctions," CEPR Discussion Papers 3240, C.E.P.R. Discussion Papers.
    12. Efraim Benmelech & Nitish Kumar & Raghuram Rajan, 2024. "The Decline of Secured Debt," Journal of Finance, American Finance Association, vol. 79(1), pages 35-93, February.
    13. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," The Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 602-634.
    14. Corbisiero, Giuseppe, 2022. "Bank lending, collateral, and credit traps in a monetary union," European Economic Review, Elsevier, vol. 144(C).
    15. Eckbo, B. Espen & Thorburn, Karin S., 2004. "Bidding in mandatory bankruptcy auctions: Theory and evidence," Discussion Papers 2004/16, Norwegian School of Economics, Department of Business and Management Science.
    16. Oliver Hart, 2017. "Incomplete Contracts and Control," American Economic Review, American Economic Association, vol. 107(7), pages 1731-1752, July.
    17. Krishnamurthy, Arvind, 2003. "Collateral constraints and the amplification mechanism," Journal of Economic Theory, Elsevier, vol. 111(2), pages 277-292, August.
    18. Christophe J. GODLEWSKI, 2014. "What drives the dynamics of bank debt renegotiation in Europe? A survival analysis approach," Working Papers of LaRGE Research Center 2014-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    19. Axel Gautier & Florian Heider, 2001. "What Do Internal Capital Markets Do? Redistribution vs. Incentives," FMG Discussion Papers dp386, Financial Markets Group.
    20. Marianna Succurro, 2012. "Bankruptcy systems and economic performance across countries: some empirical evidence," European Journal of Law and Economics, Springer, vol. 33(1), pages 101-126, February.

    More about this item

    Keywords

    bankruptcy law; business cycles; financial distress;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:2004-fe-07. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.