Publication: Innovations in Bankruptcy—Pricing the Priority of Insolvency Claims
Date
1999-09
ISSN
Published
1999-09
Author(s)
Leechor, Chad
Abstract
Following the wave of recent financial
turmoil, many developing countries have learned the value of
an effective bankruptcy system in deterring excessive use of
debt and providing an orderly way to resolve a debt crisis.
As a result, they are now reforming their bankruptcy
systems, generally modeling them on those of advanced
countries. But there is dissatisfaction with bankruptcy
frameworks in advanced countries too. Some alternatives have
been proposed. One is an options-based approach that
provides an objective way of pricing creditor claims
according to priority. With allowances for local conditions,
this approach offers developing countries a chance to
leapfrog existing bankruptcy practices and their
limitations. Effective bankruptcy systems have implications
for corporate governance and for securities markets. For
corporate managers and controlling shareholders, the cost of
bankruptcy includes the loss of corporate control and the
risk of personal liability. This threat serves as a
restraint on the use of debt. In the event of default an
efficient and orderly transfer of corporate control to
creditors reduces the likelihood of asset stripping and
looting by insiders. For creditors, available legal recourse
makes it possible to extend credit at a reasonable cost. And
in a cyclical downturn or in the face of financial distress,
creditors are less likely to panic and liquidate securities
on a massive scale.
Citation
“Leechor, Chad. 1999. Innovations in Bankruptcy—Pricing the Priority of Insolvency Claims. Viewpoint. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/3df770b0-84f4-59ee-b887-ee479b9fd35c License: CC BY 3.0 IGO.”
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