Bankruptcy Regulations Research Articles

Failure Is an Option: Institutional Change, Entrepreneurial Risk, and New Firm Growth

Does an institutional change that lowers failure barriers improve new firm growth? We take advantage of a quasi-natural experiment in Japan that drastically reduced the stringency of bankruptcy regulations to examine this question. Using longitudinal data over a 10-year period, we find that bankruptcy reform increases the rates of bankruptcy and founding—and, more importantly, the likelihood of high-growth ventures—by disproportionately encouraging elite individuals (i.e., those with superior human and social capital) to start firms. In turn, these firms are more likely than others to achieve high growth. Broadly put, we contribute to research at the nexus of institutional theory and entrepreneurship by emphasizing the connectedness of barriers to failure, venture growth, and elite entrepreneurs. We also highlight how institutional change that eases bankruptcy change can foster a regenerative cycle of failure, founding, and growth by attracting more capable entrepreneurs. Overall, we conclude that lowering barriers to failure via lenient bankruptcy laws encourages more capable—and not just more—entrepreneurs to start firms. The online appendix is available at https://doi.org/10.1287/orsc.2017.1110 .

Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations

We apply prospect theory to explain how personal and corporate bankruptcy laws affect risk perceptions of entrepreneurs at time of entry and therefore their growth ambitions. Previous theories have reached ambiguous conclusions as to whether countries with more debtor-friendly bankruptcy laws (i.e. laws that are more forgiving towards debtors in bankruptcy proceedings) are likely to have more entrepreneurs, or whether, creditor-friendly regimes have positive effects on new ventures via enhanced incentives for the supply of credit to entrepreneurs. Responding to this ambiguity, we apply prospect theory to propose that entrepreneurs do not attach the same significance to different elements of bankruptcy codes—and to explain which aspects of debtor-friendly bankruptcy laws matter more to entrepreneurs. Based on this, we derive and confirm hypotheses about the impact of aspects of bankruptcy codes on entrepreneurial activity using the Global Entrepreneurship Monitor combined with data on both personal and corporate bankruptcy regulations for 15 developed OECD countries. We use multilevel random coefficient logistic regressions to take account of the hierarchical nature of the data (country and individual levels). Because entrepreneurs and creditors are sensitive to different elements of the codes, there is scope for optimisation of the legal design of bankruptcy law to achieve both an adequate supply of credit and to encourage high-ambition entrepreneurship.

International Analysis of Venture Capital Programs of Large Corporations and Financial Institutions

In this article, we investigate what drives large companies (nonfinancial corporations and financial institutions) worldwide to run venture capital (VC) programs, specifically targeting Fortune Global 500 companies. Such a decision involves trade–offs between expected strategic and financial benefits and costs of managing and financing a portfolio of ventures, which are influenced by the institutions and regulations that affect innovation–oriented entrepreneurship. We determine that companies are more likely to run a program if they are based in countries in which the market for early–stage investments is well developed and innovation–related resources are more widely available. Moreover, companies based in countries with costly personal bankruptcy regulations are less likely to run a VC program, which is consistent with the prediction that these regulations discourage entrepreneurial initiatives. These findings emphasize the importance of favorable local conditions for an affiliated VC program. We observe no evidence, however, that unfavorable local conditions affect the degree of internationalization of programs, suggesting that running international programs entails significant extra costs. Finally, no significant difference emerges between U.S.–based and Western European–based companies.

International Analysis of Venture Capital Programs of Large Corporations and Financial Institutions

In this article, we investigate what drives large companies (non-financial corporations and financial institutions) worldwide to run venture capital (VC) programs, specifically targeting Fortune Global 500 companies. Such a decision involves trade-offs between expected strategic and financial benefits and costs of managing and financing a portfolio of ventures, which are influenced by the institutions and regulations that affect innovation-oriented entrepreneurship. We determine that companies are more likely to run a program if they are based in countries in which the market for early-stage investments is well-developed and innovation-related resources are more widely available. Moreover, companies based in countries with costly personal bankruptcy regulations are less likely to run a VC program, which is consistent with the prediction that these regulations discourage entrepreneurial initiatives. These findings emphasize the importance of favorable local conditions for an affiliated VC program. We observe no evidence, however, that unfavorable local conditions affect the degree of internationalization of programs, suggesting that running international programs entails significant extra costs. Finally, no significant difference emerges between U.S.-based and Western European-based companies.

Amministrazione E Controllo Delle Società Di Capitali in Concordato Preventivo (Dalla Domanda All’Omologazione) (Management and Internal Audit of Companies in Judicial Turnaround (from Petition to Judgment))

The failing companies can try to avoid their economic or financial crisis by judicial turnarounds. The legal framework provides some different principles and some specific rules for pre-insolvent companies. The goal of the study is to focus on Italian Bankruptcy Regulations to understand how much the crisis involves changes in the relationships between company bodies and which are the due conducts by directors and internal auditors.

Bankruptcy practice in the absence of long-term corporate financing: The Nigerian case

Evidences contained in this paper show that there is a serious dearth of long-term corporate finances in Nigeria. The paper draws out clearly the fact that there are many deficiencies in the legal instruments governing bankruptcy practices in the country, and that it is these deficiencies which joined to erode confidence in the financial system. Its conclusion, among others, is that the near lack of long-term investment capital in Nigeria may therefore be owing to the gaps in the bankruptcy and collateral laws, and that even the recent banking consolidation was formulated and implemented without any attempt to equally close these gaps. The paper suggests that the present banking industry in the country would only succeed in playing an efficient intermediation role in the economy if the bankruptcy regulation were reformed as well in order to make adequate provisions for corporate liquidation, workout and reorganisation, as part of its debt resolution options; in addition, it is necessary to incorporate provisions that ensure the equitable allocation of risks in cases of liquidation and the protection of the value of an insolvent in cases of liquidation or reorganisation. These, the paper recognises, are the ingredients of efficiency bankruptcy regulations in countries with exemplary debt markets.

An Empirical Analysis of the Relationship Between Capital Acquisition and Bankruptcy Laws

Ineffective capital acquisition decisions at start‐up may lead to business failure and bankruptcy; a result which is both costly and disruptive to the owners and other stakeholders of the firm. To cope with the risk of failure, owners embark on a variety of risk‐reducing activities whereas the U.S. government attempts to moderate the downside effects of such failures through the rules surrounding bankruptcy. Previous studies imply that as owners become more aware of the protections offered through the government regulation of bankruptcy, they should become less concerned with the effects of failure and be willing to raise higher levels of initial capital. Raising higher levels of initial capital, in turn, leads owners to take actions intended to reduce firm risk and to minimize the threat to their personal financial security. Data from a sample of small firms confirm our hypothesis by showing that as the level of initial capital acquisition increases, owners embark on activities intended to reduce firm risk. However, capital acquisition is not associated with the owner's familiarity with bankruptcy regulations. As a result, governmental objectives in establishing these regulations may not be achieved. Our findings have implications for firms’ owners, consultants, and policymakers, in terms of the relationship between an entrepreneur's knowledge of bankruptcy laws and the financing of their enterprises.

A superior win and an inferior loss: new developments in Chinese bankruptcy laws and regulations

The long-awaited new Enterprise Bankruptcy Law (the New Bankruptcy Law) of the People's Republic of China (the PRC) was finally promulgated by the 23rd Session of the Standing Committee of the Tenth NPC and was effective on 1 June 2007. While the New Bankruptcy Law bears similar features of other bankruptcy laws around the world, it shows several new developments, which deserve further introduction. This paper will examine the Old Bankruptcy Law, as well as other regulations. In addition, new developments of the New Bankruptcy Law will be emphasised. The main intention of this paper is to comment on the newly promulgated Enterprise Bankruptcy Law. The author aims to address several remaining problems, which are supposed to be improved in the near future. The author concludes and recommends that a unified bankruptcy law must be adopted in order to deal with various debtors.

Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings

Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer's incentives prior to distress and during a period of good conduct following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor's choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.

Economic Valuation of the Efficiency of Bankruptcy Systems

The market valuation of corporate insolvency problems is conditioned by the attributes of bankruptcy laws, with different codes traditionally being oriented toward protecting the debtor or the creditor. Nevertheless, it is also necessary to address the objective of each concrete measure established in the legislation to try to resolve financial distress. This study carries out an approximation, taking into account the different types of efficiency in bankruptcy regulations, the antagonistic character that, on occasions, exists between them, and the market valuation of each one of these, by way of an international analysis undertaken within the main European Union countries.

Permanent and expanded: chapter 12 bankruptcy regulations following BAPCPA

The purpose of this article is to describe Chapter 12 of the Federal Bankruptcy Code and recent changes in federal bankruptcy legislation that affect family farmers and fishermen. Chapter 12 provides debt relief to financially stressed family farmers and, since 2005, fishermen with regular income. It was first enacted in 1986, in response to the farm financial crisis of the early‐ to mid‐1980s, and was subsequently renewed by Congress until being made a permanent part of the Bankruptcy Code on July 1, 2005. This article provides an overview of the history and procedural aspects of Chapter 12 bankruptcy for family farmers and fishermen who are experiencing financial distress. It also discusses changes to the Bankruptcy Code enacted in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that affect the agricultural community.

Bankruptcy Regulations and the New German Insolvency Law from an Economic Point of View

Some fundamental incentive effects are analyzed which result from alternative insolvency law arrangements. Thereby ex-ante effects, which refer to decisions before the occurrence of the insolvency—in particular the credit decisions and the use of credit, are distinguished from ex post effects, which refer to the time after insolvency has begun—in particular the utilisation of the seizable assets of the debtor. A brief discussion of some fundamental criticism of the former West German bankruptcy and composition regulations follows and the essential changes of the new Insolvency law which has come into effect on January 1, 1999 are presented. Finally a procedure is discussed which could contribute to the solution of some further existing incentive problems.

Net Equity and Corporate Financing in Europe: A Comparative Analysis of German, Austrian, Spanish, French and Italian Manufacturing Companies With Share Capital During The Period 1991-1993

Throughout the Member States of the European Union, economic policy debate has centered on the terms of corporate financing, and in particular on whether the companies of each country have sufficient equity to compete in a single market. Moreover, faced with the risk of corporate insolvency, credit institutions consider a certain equity level to be one of several indicators of creditworthiness. Given this situation and within the framework of the work of the European Committee of Central Balance Sheet Offices, Germany, Austria, Spain, France and Italy and the second General Directorate of the European Commission invited a working group to compare the financial autonomy of European industrial companies. This study covered the period 1991 to 1993 and examined several issues. Do corporate equity levels vary according to the country? Do these levels vary according to company size, regardless of the country? Do small companies have a specific position in each country? This study is based on an evaluation of corporate solvency, given that equity is used by companies and their financial partners to control risk exposure. After a brief reminder of the role of equity, the study sums up the research conducted since the publication in 1958 of the paper by Modigliani and Miller and gives a critical analysis of the empirical findings of international comparisons. All such research must begin by identifying and solving the financial and statistical methodological problems inherent to comparisons of the financing conditions of different countries. The work conducted gives rise to clear conclusions. More specifically, in terms of the weighted mean, net equity levels are fairly similar in Austria, Spain, France and Germany, and only Italy appears to be under-capitalized. The median, however, divides the countries into two groups, with France and Spain showing high net equity/financial resources ratios, and Italy and Germany low ratios. Analysis of the situation of Austrian companies is far from straightforward on account of the under-representation of small companies, which overvalues the median in view of the under-capitalization of this group of companies. - Corporate equity levels vary from country to country. These differences are at least partially related to variations in taxation, bankruptcy regulations, the organization of the banking system, the relationship between banks and companies and the financing practices of each country. - An overall analysis is insufficient and must be complemented by an analysis by company size. - The situation of the companies in each country can not be evaluated without taking into account financial requirements. - In France, regardless of the size of the company, the share of equity in overall financial resources appears larger than in other countries. Moreover, the difference between the equity of small and medium-sized companies and that of large corporations is narrower than in Germany or Austria. It should also be noted that this company classification is relatively recent in France. In the early 1980s, small and medium-sized companies enjoyed a stronger financial position than large corporations. Subsequently, ebbing inflation, rising profits and expanding capital markets enabled large corporations to improve their financial structures significantly. At the beginning of the 1990s, all companies were affected by the economic downturn, with the notable exception of large French corporations, which continued to strengthen their financial structures. The low debt-to-net turnover ratio in France is due to high equity levels, as well as low borrowing requirements related to high asset turnover rates, which may be attributable to lower operating capital requirements and perhaps relatively weak fixed asset formation during the period under review. In view of the conference on 10 October 1997 in Paris, the study group calculated the ratios for 1995. The results were consistent whith those of 1991-1993. On the whole, the country classification resulting from the different ratios was confirmed. There is nevertheless an overall improvement in the various indicators of autonomy and activity, in particular in Spain.