Bankruptcy systems and economic performance across countries: some empirical evidence

Abstract

This paper examines the relationship between the insolvency systems and the investment share of GDP across countries. The objective is to find out the relationship between bankruptcy procedures and economic performances around the world. Empirical evidence suggests that: (1) the investment share of GDP is higher in those countries characterized by highly efficient bankruptcy system; the more efficient the insolvency procedures in terms of time, cost and recovery rate, the more readily available debt is and the higher the Investment/GDP ratio is; (2) the investment share of gross domestic product is positively associated with the degree of sophistication of the Bankruptcy Law, at least below a certain level of legal production; (3) data suggest some complementary effect between Bankruptcy Law and Enforcement for rich countries, while the interaction term indicates some substitution effect when poor countries are considered. Some policy implications conclude the work.

Causes and resolution of bankruptcy: The efficiency of the law

“…The liquidation process can lead to a piecemeal or complete liquidation in which case the creditors can retain the synergies generated by the firm. Sometimes, the firm value is greater if it is sold or reorganized as a whole than when the assets are sold separately; in this case, creditors would receive more money if the firm were reorganized instead of liquidated (Succurro, 2012).…”

Financial Bankruptcy across European Countries

“…While Portugal, Spain and UK register a relevant number of bankruptcies also among medium size firms and large companies, France, Germany and Italy post relatively lower default ratios among larger companies, despite significant differences in their industrial structure and insolvency legislation (Succurro, 2012 Relatively lower percentages of defaults are observed in the "Wood, cork, paper" sector and in the "Publishing, Printing" sector across all considered countries. …”

“…Due to significant differences in firms" financial structure and taking into consideration that insolvency procedures and judicial efficiency vary significantly across countries (Succurro, 2012), the effects of the recent international financial crisis on firms" bankruptcy have been more relevant in some countries than in others, as shown by year-on-year percentage variation illustrated in Table 1. Specifically, only Germany and United Kingdom have been always characterized by negative percent change in failures over previous year since 2011, while the strongest fall in 2015 has been registered in Spain, with -25.11%.…”

“…Coherently, the purpose of this study is to propose a bankruptcy prediction model which can be easily applied in the spirit of firm rehabilitation and going-concern considerations. Indeed, even if some countries have complex insolvency systems while others have simple liquidation procedure (Succurro, 2012), the principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation of insolvent firms but on the remodeling of the financial and organizational structure of debtors experiencing financial distress, so as to permit the rehabilitation and continuation of their business.…”

Factors of a Successfully Implemented Compulsory Settlement

“…Important external factors in successful financial restructuring of a company are also insolvency legislation (Armour, 2003;Ayotte & Skeel, 2009;Pindado, Rodrigues, & de la Torre, 2008;Succurro, 2008;Tarantino, 2009) and the role of the banking system (Brunner & Krahnen, 2001;Davydenko & Franks, 2006;Franks & Sussman, 2003;Huang & Huang, 2009;Levine, 1998;Senbet & Seward, 1995).…”