Search results
1 – 10 of over 3000Thanuja Ramachandra and James Olabode Bamidele Rotimi
The construction industry suffers from significantly large number of insolvencies than other industries due to its inherent characteristics and these have dire consequences on…
Abstract
Purpose
The construction industry suffers from significantly large number of insolvencies than other industries due to its inherent characteristics and these have dire consequences on project participants and the industry at large. The purpose of this paper is to determine both the causes of liquidation and the distribution of losses to construction parties through an analysis of liquidators' reports on some construction firms based in New Zealand.
Design/methodology/approach
The study collates primary information from Liquidators' reports for firms operating within three main sub‐sectors of the construction industry. The information was then analysed using simple interpretative techniques for the period covering 2005 to 2009. Altogether the data set used for the analyses included 65 construction firms.
Findings
The major reasons for construction insolvencies are found to be: financial difficulties due to non‐payment, poor debt management, drop in property prices, and the liquidation of related companies. Other reasons are discussed within the paper. The paper also illustrates that liquidation of construction firms causes payment delays and consequential losses to project stakeholders. The results show that settlements of trade creditors take an average of 18 months and payment is usually not received fully after liquidation proceedings. It is apparent that there is little security for payment losses in construction insolvencies.
Originality/value
In this paper, information on reasons for and the consequences of liquidation provide a valuable thought‐starter for managing payment problems in the construction industry. The paper extends knowledge on possible security to payment losses experienced by lower tier project participants when the upper tiers become illiquid.
Details
Keywords
Nirosh Kuruppu, Fawzi Laswad and Peter Oyelere
Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going concern…
Abstract
Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going concern assumption. Furthermore, in contrast to debtor‐oriented countries such as the USA, liquidation is the most likely outcome of corporate insolvency in creditor‐oriented countries such as the UK, Germany, Australia and New Zealand. This suggests that bankruptcy prediction models have limited use for assessing going concern in creditor‐oriented countries. This study examines the efficacy of a corporate liquidation model and a benchmark bankruptcy prediction model for assessing company liquidation. It finds that the former is more accurate in predicting company liquidations in comparison with the latter. Most importantly, Type 1 errors for the liquidation prediction model are significantly lower than for the bankruptcy prediction model, which indicates its greater efficacy as an analytical tool for assessing going concern. The results also suggest that bankruptcy prediction models might not be appropriate for assessing going concern in countries where the insolvency code is creditor‐oriented.
Details
Keywords
Mohd Irfan, Sarani Saha and Sanjay Kumar Singh
The purpose of this paper is to examine the factors associated with three modes of firms’ exit (voluntary liquidation, involuntary liquidation and acquisition) in a mutually…
Abstract
Purpose
The purpose of this paper is to examine the factors associated with three modes of firms’ exit (voluntary liquidation, involuntary liquidation and acquisition) in a mutually exclusive environment. In particular, three modes of exit are treated as independent events given that different causes and consequences exist for each exit mode. The data set is a panel of 4,408 US manufacturing firms spanning over the period 1976–1995.
Design/methodology/approach
The discrete choice model is used to establish a relationship between modes of exit and a set of explanatory variables, which are specific to the firm, industry and macroeconomic conditions. Use of panel data encourages us to estimate a random effects multinomial logistic regression model, which allows exit modes as mutually exclusive events and at the same time controls the firm-specific unobserved heterogeneity in the sample.
Findings
The analysis suggests that the determinants of voluntary liquidation are age, size, profitability, technology intensity and inflation level. The determinants of involuntary liquidation are size, leverage, profitability and inflation level. For acquisition, determinants are age, size, advertising intensity, Tobin’s q, GDP growth, inflation level and interest rate. The findings suggest that exit modes have a different set of determinants and the scale of effects of some common determinants such as age, size and profitability differs between exit modes.
Research limitations/implications
The analysis presented in this study relies on data from US manufacturing firms only. Thus, there is a need to explore the determinants of exit modes in other countries as well using the proposed econometric model.
Practical implications
The findings presented in this paper are useful for managers and policymakers to design strategies/actions for avoiding particular mode of exit.
Originality/value
This study provides empirical evidence on the differences in factors associated with exit modes and confirms the existence of mutually exclusive nature of exit modes. Findings suggest that for future empirical studies on firm exit, the exit modes must be treated as a heterogeneous event.
Details
Keywords
Sunaina Kanojia and Shasta Gupta
This study aims to analyse the outcomes of Indian insolvency proceedings for their ex-post economic efficiency. Ideally, insolvent yet viable companies should witness resolution…
Abstract
Purpose
This study aims to analyse the outcomes of Indian insolvency proceedings for their ex-post economic efficiency. Ideally, insolvent yet viable companies should witness resolution, whereas insolvent-unviable companies should be liquidated. This study aims to ascertain the key forces that ensure or prevent the application of the first part of this maxim in practice.
Design/methodology/approach
The study uses logistic regression on a sample of 320 corporate insolvencies (out of 942 insolvencies) reported under the Insolvency and Bankruptcy Code (IBC), 2016. Two-stage least squares regression is used to check endogeneity issues.
Findings
The results claim high levels of rationality from the financial creditors and acceptable levels of viability from the plan proposers for precluding liquidation of insolvent yet viable companies. The findings reveal that an excess of value from resolution over that from liquidation, controls the outcomes of insolvency proceedings. Further examinations indicate that financial creditors’ focus on upfront recovery prevents them from judging the plans on other viability-related factors. Based on the findings, this study recommends that IBC must focus on the importance of both long-term recovery rates and resolution.
Originality/value
To the best of the authors’ knowledge, this is one of the first studies to empirically analyse Type 2 efficiency-related errors prevalent in the Indian insolvency proceedings since the enactment of its new code. The empirical explorations offered in this research can prove to be unique for policy-making.
Details
Keywords
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…
Abstract
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.
Details
Keywords
Woodrow W. Cushing and Daniel E. McCarty
This study develops a model for estimating an index measure of asset specificity based on the liquidation value of corporate firms and the proportional distribution of their…
Abstract
This study develops a model for estimating an index measure of asset specificity based on the liquidation value of corporate firms and the proportional distribution of their pre‐liquidation assets. A statistically significant positive relationship was found to exist between the estimated specificity index and financial leverage supporting the theoretical prediction. Additional evidence was found that firms with higher variability in sales, lower probabilities of failure, higher valued non‐debt tax shields and higher levels of financial slack use less financial leverage.
Ran Lu-Andrews and Yin Yu-Thompson
The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation…
Abstract
Purpose
The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation value of the firm. The purpose of this paper is to examine the relations between CEO inside debt ratios and tangible assets (i.e. asset tangibility, liquidation value, and fixed asset investment).
Design/methodology/approach
The authors use the Ordinary Least Square (OLS) contemporaneous and lead-lag regression analyses. They also use two-stage least-square (2SLS) regression analysis for robustness check.
Findings
The findings are fourfold: first, CEO inside debt has a positive effect on asset tangibility of the firm; second, CEO inside debt has a positive effect on the liquidation value of the firm; third, CEO inside debt has a positive effect on the tangible asset investment (as measured by capital expenditures) of the firm; and fourth, these positive effects are found in both the contemporaneous year and the subsequent year and in both OLS and 2SLS frameworks. The research provides further evidence that CEOs with higher inside debt holdings exhibit safety-seeking behavior. The authors document direct proof for the theory proposed by Edmans and Liu (2011) that these CEOs, like any creditors, care a great deal of the asset tangibility and liquidation value of the firm.
Originality/value
This study contributes to the existing literature by providing further empirical evidence to support that CEO inside debt holdings have impacts on firm investment decisions and capital allocations. Inside debt does help align the executive managers’ personal incentive with firms’ value, and mitigate the agency conflicts between managers and debt holders. This study provides significant empirical evidence to support the theory suggested by Edmans and Liu (2011) that CEOs with higher level of inside debt holdings do care a greater deal about the asset liquidation value of the firm, and these firms tend to invest more in tangible assets to preserve the liquidation value.
Details
Keywords
The purpose of the paper is to analyze the new Bankruptcy Law in Saudi Arabia (KSA Bankruptcy Law) under both a comparative lens and a policy-oriented one, while highlighting some…
Abstract
Purpose
The purpose of the paper is to analyze the new Bankruptcy Law in Saudi Arabia (KSA Bankruptcy Law) under both a comparative lens and a policy-oriented one, while highlighting some of the most essential operational steps and procedures in a bankruptcy proceeding under the law.
Design/methodology/approach
The approach adopted analyzes the specific mechanics and procedures of a bankruptcy law under the general policies and goals of bankruptcy. Additionally, where appropriate, a brief comparison to the US Bankruptcy code and its provisions is presented to provide an alternative approach on how similar issues are handled under a reputable and proven bankruptcy system.
Findings
Overall, the KSA Bankruptcy Law is a major accomplishment and advancement to the Kingdom’s insolvency regime. The law consolidated and codified the laws governing bankruptcy under the Kingdom’s prior regime, and followed the structure of a modern bankruptcy regime. In doing so, several of the law’s policies and objectives have been fulfilled by providing an effective, predictable and reliable bankruptcy system.
Originality/value
Given the relatively recent adoption of the KSA Bankruptcy Law, the paper provides a comprehensive assessment of the law’s operation and its effectiveness in achieving its policy goals as a modern bankruptcy law.
Details
Keywords
Proposes a reputation‐based model to examine the managerial investment and liquidation decisions regarding real estate projects in developing countries. Unlike investments in…
Abstract
Proposes a reputation‐based model to examine the managerial investment and liquidation decisions regarding real estate projects in developing countries. Unlike investments in domestic projects, foreign investments are subject to noisy monitoring, resulting in a liquidation inefficiency where managers preserve their reputational capital by not liquidating projects likely to fail as long as negative signals are not revealed to the public. The manager’s decision to invest in foreign countries is influenced not only by the difference between foreign and domestic project returns, but also by the change in reputational capital. Shows that reputation‐based utility maximization can lead to an under‐investment in profitable foreign projects. Government support to invest in foreign countries can reduce the under‐investment problem, but it can also increase the liquidation inefficiency.
Details
Keywords
Dieter Kaiser and Florian Haberfelner
The purpose of this paper is to explore how hedge fund database biases developed during the 2007‐2009 financial crisis.
Abstract
Purpose
The purpose of this paper is to explore how hedge fund database biases developed during the 2007‐2009 financial crisis.
Design/methodology/approach
The sample consists of 8,935 hedge funds from the Lipper TASS Hedge Fund Database for the January 2002‐September 2010 time period. The theoretical foundation of this paper draws from Fung and Hsieh who argue that time series of funds of hedge funds should be less prone to some of the documented database biases. The paper uses a sampling technique to create hedge fund portfolios, and then compares them using fund of fund data.
Findings
The paper finds empirical evidence that fund of hedge fund data is less biased than single hedge fund data, and that the impact of the survivorship and backfilling biases has increased since the financial crisis. It also finds that the attrition rate for hedge funds has nearly doubled since the financial crisis, and that an elevated attrition rate has a negative impact on the quality and representativeness of hedge fund data due to the liquidation bias. The liquidation bias increased strongly in the aftermath of the financial crisis. It also fluctuates over time, and it can account for an overestimate of performance of over 10 percent p.a.
Originality/value
Given this increase and the volatile nature of hedge fund biases, we believe investors (for benchmarking) and academics (for empirical studies) should consider refraining from using single hedge fund index data.
Details