Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations

Abstract

We examine the effectiveness of bankruptcy institutions at promoting socially efficient allocation of resources. Under the Slovenian simplified reorganization procedure, firms with rejected reorganization proposals are not automatically liquidated. This unique institutional feature facilitates an estimation of the extent of different types of filtering failures. Based on an ex-post conceptualization of firm viability, Type I errors (the acceptance of plans by non-viable firms) are more likely than Type II errors (the rejection of plans by viable firms) and the overall incidence of filtering failure is 27%. Based on an ex-ante conceptualization of firm viability, any given reduction in Type II errors would give rise to three times as many Type I errors. We contextualize our findings in the light of prior results in the literature, alternative mechanisms for insolvency resolution, and related bankruptcy reorganization schemes internationally where courts are awarded a comparatively more prominent role.

Creditors, Plan Confirmations, and Bankruptcy Reorganizations: Lessons from Slovenia

“…com. 55 For an extended discussion of the pros and cons of different conceptualizations of the viability of a business and the associated data-related tradeoffs, see Cepec and Grajzl (2019). 56 See Fisher and Martel (2004); Cepec and Grajzl (2019).…”

“…55 For an extended discussion of the pros and cons of different conceptualizations of the viability of a business and the associated data-related tradeoffs, see Cepec and Grajzl (2019). 56 See Fisher and Martel (2004); Cepec and Grajzl (2019). 57 None of the businesses in our data are voluntarily dissolved or, alternatively, merged with or acquired by other businesses.…”

“…Similarly, only a handful of studies outside of the US offer fully-fledged empirical estimates of the prevalence of socially costly filtering errors (see Sect. 5) that arise either in reorganization bankruptcies (Fisher and Martel 2004;Cepec and Grajzl 2019) or, less directly pertinent to our analysis, in the insolvency system more generally (Camacho-Miñano et al 2013;Staszkiewicz and Morawska 2019). A further set of studies (e.g., Laitinen 2011;Leyman 2012;Leyman et al 2011;Dewaelhenys and Van Hulle 2009;Mayr et al 2017;Kärkinen 2019;Ayadi et al 2021) provide an empirical perspective on some aspect of the filtering success of different bankruptcy reorganization schemes utilized in Europe, but without providing comprehensive estimates of the incidence of different types of filtering failures.…”

The Impact of Delay: Evidence from Formal Out-of-Court Restructuring

“…In the sample of settled debtors (n settled = 1572), 26.3% (412) did not survive until the last observed year (2019), a Type I error in the PBS process while among the sample of unsettled debtors (n notsettled = 462), 48.9% (226) survive until 2019, a Type II error of the PBS process. 34 Results in Table A6 show that bargaining failure reduces the three-year survival prob-34 For more on Type I and Type II error in bankruptcy, see White (1994) and Cepec and Grajzl (2019).…”

Financial Situation of Pre-Packed Insolvencies

“…It verifies if it could be expected successful reorganization and sustainability of going concern principle because of preceding financial conditions. Although there are the papers discussing the legal environment and success of these insolvency cases there are only several research works focused on the financial situation before the insolvency proceeding solved as a reorganization (Fisher & Martel, 2014;Leyman et al, 2011;Cepec & Grajzl, 2019). The pre-packs have not been analyzed from this point of view yet.…”