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Dissecting bankruptcy frictions

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Listed:
  • Dou, Winston Wei
  • Taylor, Lucian A.
  • Wang, Wei
  • Wang, Wenyu
Abstract
How efficient is corporate bankruptcy in the United States? Two frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We find large bankruptcy inefficiencies, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by 18% more. Without these frictions, 14% more cases would be resolved pre-court, and court cases would be 73% shorter. With less delay, bankruptcy’s indirect costs would be much lower. In contrast, inefficiencies from excess liquidation and excess continuation are quite small.

Suggested Citation

  • Dou, Winston Wei & Taylor, Lucian A. & Wang, Wei & Wang, Wenyu, 2021. "Dissecting bankruptcy frictions," Journal of Financial Economics, Elsevier, vol. 142(3), pages 975-1000.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:3:p:975-1000
    DOI: 10.1016/j.jfineco.2021.06.014
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    More about this item

    Keywords

    Bankruptcy; Structural estimation; Conflicts of interest; Asymmetric information;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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