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The Impact of Delay: Evidence from Formal Out-of-Court Restructuring

Author

Listed:
  • Stjepan Srhoj
  • Dejan Kovac
  • Jacob N. Shapiro
  • Randall K. Filer
Abstract
Bankruptcy restructuring procedures are used in most legal systems to decide the fate of businesses facing financial hardship. We study how bargaining failures in such procedures impact the economic performance of participating firms in the context of Croatia, which introduced a “pre-bankruptcy settlement” (PBS) process in the wake of the Great Recession of 2007 - 2009. Local institutions left over from the communist era provide annual financial statements for both sides of more than 180,000 debtorcreditor pairs, enabling us to address selection into failed negotiations by matching a rich set of creditor and debtor characteristics. Failures to settle at the PBS stage due to idiosyncratic bargaining problems, which effectively delays entry into the standard bankruptcy procedure, leads to a lower rate of survival among debtors as well as reduced employment, revenue, and profits. We also track how bargaining failures diffuse through the network of creditors, finding a significant negative effect on small creditors, but not others. Our results highlight the impact of delay and the importance of structuring bankruptcy procedures to rapidly resolve uncertainty about firms’ future prospects.

Suggested Citation

  • Stjepan Srhoj & Dejan Kovac & Jacob N. Shapiro & Randall K. Filer, 2021. "The Impact of Delay: Evidence from Formal Out-of-Court Restructuring," CERGE-EI Working Papers wp700, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp700
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    Cited by:

    1. Biswajit Banerjee & Risto Herrala, 2024. "Testing the impact of liquidation speed on leverage using Indian data," Working Papers 113, Ashoka University, Department of Economics.
    2. Edward I. Altman & Marco Balzano & Alessandro Giannozzi & Stjepan Srhoj, 2023. "Revisiting SME default predictors: The Omega Score," Journal of Small Business Management, Taylor & Francis Journals, vol. 61(6), pages 2383-2417, November.
    3. Stjepan Srhoj & Melko Dragojević, 2024. "Public Procurement and Supplier Job Creation: Insights from Auctions," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 40(2), pages 470-527.
    4. Banerjee, Biswajit & Herrala, Risto, 2024. "Testing the impact of liquidation speed on leverage using Indian data," BOFIT Discussion Papers 6/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    5. HONDA Tomohito & ONO Arito & UESUGI Iichiro & YASUDA Yukihiro, 2023. "Anatomy of Out-of-court Debt Workouts for SMEs," Discussion papers 23088, Research Institute of Economy, Trade and Industry (RIETI).
    6. Błażej Prusak & Paweł Galiński, 2021. "Approval of an Arrangement in the Restructuring Proceedings and the Financial Condition of Companies Listed on the Stock Exchanges in Warsaw. Is There Any Relationship?," JRFM, MDPI, vol. 14(11), pages 1-16, November.

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    More about this item

    Keywords

    bankruptcy; insolvency; liquidation; restructuring;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • P37 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Legal

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