Keywords: Bankruptcy cost, bankruptcy reorganization, recovery rate, credit risk
Abstract: We test the widely held assumption that longer restructurings are more costly.
In contrast to earlier studies, we use instrumental variables to control for
the endogeneity of restructuring time and creditor return. Instrumenting
proves critical to our finding that creditor recovery rates increase with
duration for roughly 1½ years following default, but decrease thereafter.
This, and similar results using the likelihood of reentering bankruptcy,
suggest that there may be an optimal time in default. Moreover, the default
duration of almost half of our sample is well outside the optimal default
duration implied by our estimates. We also find that creditors benefit from
more experienced judges and from oversight by only one judge. The results
have implications for the reform and design of bankruptcy systems.
Full paper (455 KB PDF)
| Full Paper (Screen Reader Version)
Home | FEDS | List of 2006 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: June 28, 2006