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The assets of bankrupt firms are usually sold to unsuitable buyers at an extremely discounted price. Aiming to reduce the bankruptcy cost, the purpose of this paper is to propose a novel insurance system for associated loans.

In this insurance system, the joined firms are from the same industry and have a responsibility to buy the assets of potentially bankrupt firms at a relatively high price, because they could make better use of the assets than the buyers outside the industry. Further, the authors use the Shapley value to address the problem of bankruptcy cost allocation and additionally employ the method of Monte Carlo simulation to derive the numerical solution of the insurance premium of bankruptcy cost.

First, the relatively healthy and solvent firms in the insurance system could gain a larger proportion of benefits derived from the reduced cost of default, interestingly, the more so when the external cost of default is larger. Second, given the positive relationship between bankruptcy cost and asset correlation in practice, lenders and insurers face a trade-off to balance the cost against the benefit of asset correlation. Third, insurance premiums and bankruptcy costs decrease with the number of firms participating in this insurance system.

This paper proposes a novel insurance for associated loans, in which joined firms can pay a relatively low insurance premium due to the realization of reducing bankruptcy cost.

In bankruptcy, a reorganization procedure is based on the terms of a reorganization plan aimed to save a financially distressed firm. We provide an original approach of the reorganization plan that we treated as a future contract that demands to creditors a certain degree of cost sharing. This paper examines how the sharing of the reorganization plan costs influences the bankruptcy outcome of such firm.

The sharing of the costs between creditors and debtor is analyzed by a static theoretical model that uses a Lagrangian approach.

We show that debtors have strong incentives to propose reorganization plans which provide an expected gain for creditors higher than the liquidation value of the firm and lower than the payment of the reorganization plan with an optimal sharing degree. Hence, a reorganization plan can be rejected by creditors if the sharing degree is too important.

The liquidation of the firm can be avoided if the design of the reorganization plan is improved by performing an appraisal or purchasing the services of an audit company.

The novelty of this paper resides in the distinction of two types of bankruptcy legal systems. The first one represents a pro-creditor or a creditor-friendly bankruptcy system in which the claimants’ payment is not limited to a fixed value written in the reorganization plan. Conversely, we treated the case of a debtor-friendly bankruptcy system which limits the creditors’ payment. The results of our model hold independently of the bankruptcy law orientation, that is, pro-creditor or pro-debtor.

This paper aims to clarify the effects of introducing depositor preference on resolution costs, probability of default and bank funding costs, allowing for the possibility of collateralized funding.

The importance of conflict among creditors in generating bankruptcy costs is documented. A model of such a conflict is provided, which is then used in analyzing the effects of depositor preference and other forms of asset encumbrance. The model takes into account the reactions of providers of secured and unsecured financing.

Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

The interaction of asset encumbrance with liquidity risk is not addressed directly.

The issues addressed on the paper are currently the subject of debate by regulators and market participants. There are direct implications for prudential regulation and bank resolution policies.

The theory of conflict resolution is applied to bankruptcy and bank resolution, generating rigorous analysis of an important practical issue.

The purpose of this article is to determine the optimal use of collateral in order to maximize the borrower's wealth by reducing the interest rate payments. This analysis is to shed light on the fundamental question whether good or bad borrowers pledge more collateral.

The analysis bases on a simple firm value model similar to Merton's but with the additional feature that the borrower can bring in collateral. This article not only presents the case with perfect information between borrowers and lenders but also regards the consequences arising from asymmetric information.

A bad borrower, who is characterized by higher bankruptcy costs, riskier projects, and a lower contribution to the project value, typically pledges more collateral than a good borrower. These relationships base on the existence of perfect information between borrowers and lenders. If asymmetric information in terms of the project's riskiness or the contribution of the borrower to the project is present, these relationships invert and good borrowers tend to pledge more collateral. As a result, the allocation of information between a borrower and a lender is crucial for the optimal choice of collateral.

This research underlines the potential for firms to add firm value by pledging collateral because collateral reduces interest rates and therefore results in more attractive terms of the loan. On the other hand, further empirical research can be done to verify our theoretical finding that under perfect information bad borrowers pledge more collateral, while under asymmetric information primarily good borrowers use collateral.

This paper introduces a new motive for the use of collateral and explains – in contrast to many other theoretical models – why bad borrowers tend to pledge more collateral.

The purpose of this paper is to explore the impact of creditors' undervaluing the total expected cost of a borrower's bankruptcy filing because a portion of the cost will be borne by other lenders. Creditors who bear a smaller portion of the total cost of a personal bankruptcy would be expected to take less care to avoid triggering one.

This paper presents a theoretical model of a creditor's decision of how aggressively to pursue collection. The model shows that because each lender's collection actions increase the probability of bankruptcy, each lender will collect more aggressively when a borrower has many loans. The paper tests the predictions of the model using a large dataset of credit card accounts.

The model highlights an important testable result: holding the level of debt constant, a borrower with many loans is more likely to choose formal bankruptcy and less likely to choose informal bankruptcy, i.e. chronic non-repayment absent a bankruptcy filing. This paper finds evidence that strongly supports the predictions of the model. Laws that limit creditor collection actions do not appear to mitigate the effects of increasing number of loans.

While a few papers have tested whether strategic interactions may impact business bankruptcy, no paper of which the author is aware has provided clear empirical evidence of the existence of common pool effects in the personal credit market. These effects point to an important and potentially underappreciated source of risk for borrowers and creditors in this market.

The demand-side view of creditor rights posits a negative association between creditor rights and corporate borrowings. The purpose of this paper is as follows: first, the author examines whether the demand-side effect is more pronounced amongst firms with excess promoter shareholding. Subsequently, the authors analyze the impact of high promoter holdings on investment decisions owing to bankruptcy reforms.

To answer the above questions, the authors exploit the passage of the Insolvency and Bankruptcy Code (IBC) (2016) that strengthens the creditor rights of lenders, which impacts the borrowings and financing activities of Indian corporates. Using a panel of listed Indian firms over the period of 2012–2019, the authors analyze how the IBC affects firms’ borrowings and financing decisions with excess promoter holdings.

The authors find that bankruptcy reforms led to a statistically significant decline in the use of borrowed funds (primarily secured and long-term debt) by firms with high concentrated holdings. The analysis also indicates that firms with excess promoter ownership face an increased cost of debt due to bankruptcy reforms. As a result, firms with excess promoter holdings curtail their investments. Overall, the results indicate that India’s bankruptcy reforms significantly affect the firms’ financing and investment decisions with highly concentrated ownership.

While past research has explored the relationship between bankruptcy reforms and demand for/supply of debt, the authors provide novel empirical evidence on the role of promoter holdings that affects the relationship between bankruptcy law and financing and investment decisions. To the best of the author’s knowledge, this study is the first to investigate the role of ownership structure in the context of bankruptcy reforms by using a quasi-natural experiment.

The purpose of this paper is to investigate the determinants of bankruptcy protection duration of Canadian public firms, and also investigate the duration for various bankruptcy outcomes including the liquidation and re-emergence of bankrupt firms.

This study uses data on all Canadian public firms that applied for bankruptcy protection over the period 1992–2014. The authors mainly apply duration and survival analyses to draw the main conclusions.

The authors find that larger and older firms with more complicated structures and issues to settle tend to remain under protection from creditors longer, and also ascertain that the fate of relatively successful companies is determined faster. Moreover, the authors report that it takes less time to achieve a final solution for firms under bankruptcy protection when interest rates are increasing and the term spread is high. Finally, firms that file for protection under the Companies’ Creditors Arrangement Act (CCAA) spend longer restructuring than firms that file under the Bankruptcy and Insolvency Act.

The paper investigates only publicly listed firms. The data on private firms that are required to conduct the research are not available.

Various stakeholders including regulators can predict the bankruptcy protection period using the paper’s findings. Depending on the desired outcomes (reduce uncertainly, safeguard jobs or protect creditors’ rights), specific rules can be followed.

To the authors; knowledge, this is the first paper that investigates the Canadian bankruptcy protection duration. It uses the unique Canadian framework to infer the determinants of bankruptcy protection duration and bankrupt firms’ outcomes.

Although several microeconomic and macroeconomic factors driving banks' credit quality have been well-studied in the literature, one aspect which appears to have received limited attention is bankruptcy reforms. To address this issue, the author exploits data on Middle East and North Africa (MENA) country banks during the period 2010–2020 and examines the impact of bankruptcy laws on their credit quality.

In view of the staggered nature of the implementation of legal reforms across countries, the author utilize a difference-in-differences specification to tease out the causal impact.

The findings reveal that bankruptcy reforms lead to a significant improvement in banks' credit quality. The impact is manifest mainly for conventional banks and driven by an increase in recovery intensity. The author also presents evidence which shows that such reforms exert positive real effects, although this impact differs across country characteristics.

The study is among the early ones for the MENA region to assess the interlinkage between bankruptcy reforms and banks' credit quality.

This paper aims to analyze the ex ante and ex post economic efficiency of the preventive agreement (concordato preventivo) or composition with creditors as defined by the Italian Bankruptcy Law. This study examines four possible outcomes of the procedure: homologation (confirmation); the degree of dissent/consent of creditors; the revocation, admissibility or inadmissibility; the declaration of the company bankruptcy in preventive agreement.

This paper uses data from 728 Italian companies which filed for preventive agreement in 2016. In reference to each of the four possible outcomes, this study applies nine logit regressions to analyze the effects of a series of efficiency variables ex ante (corporate-based drivers) and ex post (procedure-based drivers).

Results show the relevance of the debt structure, ownership structure and virtuous behavior, corporate governance and management systems, as well as effectivity of the court control on the preventive agreement outcome.

This paper draws on original data of bankruptcy in Italy and gives empirical evidence of the ex ante and ex post factors on the outcomes of the preventive agreement.

This paper aims to explain the weaknesses and inconsistencies inherent in the Dodd-Frank Act of 2010 (USA).

The approach is entirely theoretical and multi-disciplinary (and relies on some third-party empirical research), and it consists of a literature review, critique and the development of theories which are applicable across countries.

The Dodd-Frank Act is inefficient and inadequate as a response to the global financial crisis. The Dodd-Frank Act has not resulted in significant economic growth and has increased transaction costs and compliance costs for both government agencies and financial services companies.

The author developed the theories introduced in the paper.