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Avoidance Powers and Incentives to File for Bankruptcy *
Author(s) -
Kim JeongYoo,
Joo Sang Lyong
Publication year - 2010
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01017.x
Subject(s) - creditor , bankruptcy , profitability index , incentive , business , debtor , law and economics , monetary economics , microeconomics , finance , economics , debt
In this paper, we examine the incentives for a failing debtor and creditors to file for bankruptcy either under Chapter 7 or Chapter 11, and discuss whether avoidance powers can provide proper incentives to file. We show that if the future profitability of a failing firm is known, avoidance powers can eliminate an inefficient delay in bankruptcy filing. However, if profitability is uncertain, in particular, if a creditor is pessimistic, what might result is an inefficient rush to file under Chapter 7. We also demonstrate that the conditional avoidance powers can give creditors a stronger incentive to gather information pertinent to future profitability, thereby enhancing efficiency.