Optimal bankruptcy regime: a literature review

Abstract

An optimal bankruptcy regime is one which avoids taking/giving loans during financial crisis, provides a provision for entrepreneurship, and further provides for achieving a maximum total value for the distressed firm. The present study is aimed at understanding the concept of optimal bankruptcy regime and its determinants in terms of merits and demerits. The study is purely of qualitative nature followed by the method of synthesis of 50 previous studies. The study concludes that the optimal bankruptcy regime that provides for the said three features is somehow or other helping economies to do well in terms of increased entrepreneurship, decreased number of liquidations, reduced NPAs’, and increased productive investments. It is also evident from several World Bank member countries that have opted for reorganisation of distressed businesses are experiencing the fruits of optimal bankruptcy regime in terms of achieving maximum value for the assets of distressed firms for about 71 cents on dollar and thereby entrepreneurship development.