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Journal of Financial Economics Vol. 142 No. 3 2021

Dissecting bankruptcy frictions

Winston Wei Dou1; Lucian A. Taylor1; Wei Wang2,3; Wenyu Wang3,2

1 Finance department of the Wharton School at University of Pennsylvian, 2318 Steinberg-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104, USA · 2 Queen's University · 3 Indiana University Bloomington

Abstract

How efficient is corporate bankruptcy in the United States? Two frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We find large bankruptcy inefficiencies, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by 18% more. Without these frictions, 14% more cases would be resolved pre-court, and court cases would be 73% shorter. With less delay, bankruptcy’s indirect costs would be much lower. In contrast, inefficiencies from excess liquidation and excess continuation are quite small.

DOI
10.1016/j.jfineco.2021.06.014
Volume
142
Issue
3
Pages
975-1000
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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