Context (archaeology)

Biology

Microeconomics

Bankruptcy

Continuation

Creditor

Economics

Computer science

Business

Paleontology

Excess return

Monetary economics

Debt

Information asymmetry

Programming language

Finance

Journal of Financial Economics

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.

Dissecting bankruptcy frictions