Resource Allocation and Contract Resolution in the Spanish Bankruptcy System

Abstract

In this study we analyze the factors which, once a bankruptcy procedure begins in Spain, explain the results observed after the re-negotiation of the contracts between the debtor and the creditors. The multinomial logit model is used in order to specify the functional relationship between the financial characteristics of the firm and the outcomes observed in the bankruptcy system: a) restructuring; b) failed attempts to restructure which end in dismissal; and c) liquidations. The evidence (159 bankrupt firms have been included in the study) suggests that the processes of reassignment are not simply the result of chance, but rather that they result from a decision-making process where information which is contained in the financial statements is taken into account (the cases of liquidation reflect a greater deterioration in terms of historical trajectory of profits, measured by the reserves, as well as by a lesser capacity of the current generation of resources). Additionally, we connect to the corporate finance approach to contracts as a guide for analyzing the restructuring agreements agreed upon between the debtor and the non-privileged (also called ordinary) creditors. The results indicate that, the non-privileged creditors renounce a very significant part of the value of the debt and that there exists a positive relationship between the economic quality of the firm and the collection expectations by the creditors. Finally, the possibility that the creditors exercise ex post control over the managers is not foreseen.