Insolvency Problems in the European Union: Bankruptcy Law Orientation and Market Valuation

Abstract

The reaction of stock prices to bankruptcy filing announcements has been very frequently analysed in the financial literature. In the current work we adopt a different approach to that of the traditional event study, trying to determine if the reaction of the markets is conditioned by the orientation of the bankruptcy legislation that regulates cases of corporate insolvency. With this aim in mind, we undertake an analysis on a sample of firms in financial distress in France, Germany, Spain and the UK between 1990 and 2002. Our results lead us to conclude that the valuation of the firms' securities is indeed conditioned by the type of bankruptcy law. In addition, we find that firms under creditor-oriented systems (Germany before the 1994 reform and the UK) present more negative returns due to the transference of wealth from the shareholders to the bondholders of the firms.