Abstract
This work aims to shed new light on the relation between institutional performance and firm dynamics. Considering the Italian manufacturing industry and a panel of 3 years, the authors investigate the relation between the time needed by courts to enforce debtors’ obligations and the time needed by enterprises to repay their debts. In particular, we test the hypothesis that efficiency in settling mortgage foreclosure and bankruptcy cases can affect the creditors’ decision making on judicial disputes. According to our thesis, inordinately long waiting times to enforce credit rights may increase the contractual strength of debtors, further delaying payments. As shown by our results, there is a statistically significant positive relation between the enforcement of debtors’ obligations and the adopted payment index, confirming the key role of the judiciary in the dynamics of firms. Indeed, if the time needed to settle bankruptcy cases decreases by 25%, we can expect the payment index to decrease by 1%; while, focusing on foreclosure cases, we can expect the payment index to decrease by 2%. The policy implications of these results are rather compelling. Policy makers could reform foreclosure and bankruptcy procedures to support national economic growth, without additional burden on the public budget.
Highlights
The risk of business failure is a relevant topic, with significant effects on the market and society
Our empirical strategy relies on two key time variables: the time needed by a court to settle a judicial case of insolvency and a representative proxy for the time needed by a firm to pay a debt
Once the norm for each firm is obtained, we look at the Median Absolute Deviation (MAD) to detect and drop the outliers (Leys et al, 2013; Huber, 1981)
Summary
The risk of business failure is a relevant topic, with significant effects on the market and society. Creditors’ rights need to be defended against debtors’ insolvency while, on the other hand, the national economic system needs to be supported and its reputation protected on the global market. The literature has focused on this topic, prompting academics and institutions to investigate bankruptcy and to propose new models that can. Org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
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