The effect of personal bankruptcy exemptions on investment in home equity

Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios toward home equity. Using US household data for the period 1996–2006, we find that household demand for real estate is relatively high if the marginal investment in home equity is covered by the exemption. The home equity bias is more pronounced for younger and less healthy households that face more financial uncertainty and therefore have a higher ex ante probability of bankruptcy. These results suggest that homestead exemptions have an important bearing on the portfolio allocations of US households and the extent to which they insure against bad shocks.     

U.S. consumer bankruptcy choice: The importance of general equilibrium effects

We study the implications of U.S. personal bankruptcy rules for resource allocation and welfare. Our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform. Contrary to previous work, we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input. Furthermore, subjecting Chapter 7 filers to means testing, as suggested by recent legislative proposals, would not improve upon current bankruptcy provisions and, at best, leave aggregate filings, output, and welfare unchanged. However, we do find that an alternative tightening of Chapter 7, in the form of lower asset exemptions, can increase economic efficiency.     

Fresh Start or Head Start? The Effects of Filing for Personal Bankruptcy on Work Effort

The key feature of the modern US personal bankruptcy law is to provide debtors a financial fresh start through debt discharge. It has long been believed that the primary goal of the discharge policy is to preserve human capital by maintaining incentives to work. We provide the first test of this fresh start argument by estimating the effect of personal bankruptcy filing on work effort using data from the Panel Study of Income Dynamics. Our econometric approach controls for the endogenous self-selection of bankruptcy filing. We find that filing for bankruptcy does not have a positive impact on annual work hours for bankrupt households, a result mainly due to the wealth effects of debt discharge.      

Bankruptcy and Institutions: Theory and Empirical Evidence from Korea and the United States

Using a simple z-score bankruptcy model, this article explores the relationship between bankruptcy threshold and institutions. The z-score threshold for bankruptcy is found to be higher in countries with stronger institutions. To test this claim, a cross-section data set of 86 Korean firms and 60 US firms from 1991 to 2001, extracted from a panel data set, is used. The empirical finding that the z-score bankruptcy threshold in the United States (which has better quality of institutions than does Korea) is higher than that in Korea is consistent with the prediction of the model. Additionally, having examined bankruptcy laws of the two countries, it is found that filing a petition for bankruptcy is easier and debtors rights are better protected in the United States than in Korea, which suggests that the bankruptcy laws of Korea and the United States may be partially responsible for the difference in the z-score threshold for bankruptcy.     

Personal Bankruptcy Law and New Business Formation

Using a panel of all 50 U.S. states and the District of Columbia from 1990 to 1999, we report a nonlinear relation between state bankruptcy exemptions and new business formation. The rate of new business formation first increases as exemptions increase, but it then decreases. This result reflects the fact that bankruptcy exemptions tend to affect both demand for and supply of external financing to potential entrepreneurs.     

Does the Medium Matter? The Relations among Bankruptcy Petition Filings,Broadtape Disclosure,and the Timing of Price Reactions

Drawing on a comprehensive sample of 330 bankruptcy petition filings from 1980 to 1993, we find that most of the market reaction does not occur on the bankruptcy petition filing date when the information becomes publicly available. Rather, most of the reaction occurs when news of the bankruptcy filing is more widely disseminated via the Broadtape. This "Broadtape announcement effect" persists after controlling for firm size, exchange listing, and predisclosure information. These are primarily timing differences since abnormal returns cumulated over an 11-day window centered on the filing date do not differ significantly across Broadtape disclosure date classifications.     

Evidence on the insurance effect of bankruptcy exemptions

Defaulting on one’s debts when experiencing an adverse event can help insure households against unexpected income risks. But the effect of allowing default on debt levels is ambiguous, not least because lenders may restrict access to credit. Hence the optimal punishment for bankruptcy is unclear. The US states allows householders to keep a variety of assets when filing for bankruptcy – the ‘bankruptcy exemptions’ – and these exemptions change substantially between states and over time. By exploiting these differences this study shows that raising the exemptions (i) marginally decreases the level of unsecured debt that household’s hold; (ii) makes consumption smoother. Thus, despite the effect on debt levels, the generous provisions to debtors in arrears may be helping US households to insure themselves against income risk.     

Effects of Bankruptcy Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates

This study analyzes the effects of state bankruptcy asset exemptions and foreclosure laws on mortgage default and foreclosure rates across different segments of the mortgage market. We found that the effects of these legal provisions are larger for subprime than for prime mortgages and larger for adjustable rate mortgages than for fixed rate mortgages. These results demonstrate that the effect of variation in bankruptcy exemptions and foreclosure laws is most pronounced in the most risky segments of the mortgage market, which are those that have been most affected by the continuing housing slump in the United States.     

Prior Wall Street Journal Announcements of Possible Bankruptcy Filings and Price Reactions to Subsequent Bankruptcy Filings

This study examines the relation between prior Wall Street Journal (WSJ) announcements of possible bankruptcy filings and price reactions to subsequent bankruptcy filings for 336 firms that filed for bankruptcy between 1980 and 1993. Extant research indicates that price reactions to announcements of economic events are inversely related to the amount of surprise in the announcements. Prior WSJ anouncements of possible bankruptcy filings increase the markets a priori assessment of firms' probability of bankruptcy, thereby potentially reducing the surprise in subsequent bankruptcy filings. We hypothesize smaller price reactions to bankruptcy filings for firms where the WSJ previously published an article indicating that the firm may file for bankruptcy. Our results are consistent with this hypothesis. Specifically, we find smaller price reactions to bankruptcy filings for firms with prior WSJ announcements of possible bankruptcy filings. Our results hold after controlling for firm size, probability of bankruptcy, exchange listing, leverage, and predisclosure information.     

Consumer Bankruptcies and the Bankruptcy Reform Act: A Time-Series Intervention Analysis, 1960–1997

The Bankruptcy Reform Act of 1978, effective on October 1, 1979, significantly altered the basic rules by which consumers file for bankruptcy. Between 1979 and 1997, the number of nonbusiness bankruptcies filed annually rose from 200,000 to 1.35 million, and the rate of bankruptcies per 100,000 adults increased from 129 to 715. A controversial aspect of bankruptcy is how much of this increase can be attributed to the 1978 act. Early empirical studies provide estimates ranging from a low of 6% to a high of 75% for the immediate post-act period. However, two recent studies using longer data series report that none of the increase was due to the act. Previous studies suffer from several econometric problems, including inadequate attention to stochastic properties and stationarity of the data series, as well as data errors due to reporting changes. This paper uses an ARIMA intervention analysis to estimate the impact of the 1978 act. Using adjusted quarterly data for 1960:3 to 1995:4, the data first are examined for unit roots. The tests reject the presence of seasonal unit roots but confirm the presence of a nonseasonal unit root. The empirical analysis therefore is based on logged first differences of bankruptcy filings and filing rates per capita. An ARIMA model is estimated using the preintervention data for 1960:3 to 1979:3. This model is re-estimated for 1960:3 to 1995:4 with the intervention terms included. The intervention model estimates indicate that the 1978 act increased consumer bankruptcies by 36% in the post-act period relative to the pre-act period, or about 72,400 additional bankruptcies per year. Overall, the net impact of the 1978 act was modest compared to the substantial rise in bankruptcies that has occurred since 1979.     

Can Language Predict Bankruptcy? The Explanatory Power of Tone in 10‐K Filings

We examine whether the language used in 10‐K filings reflects a firm's risk of bankruptcy. Our sample contains 424 bankrupt U.S. companies in the period 1994–2015 and we use propensity score matching to find healthy matches. Based on a logit model of failing and vital firms, our findings indicate that firms at risk of bankruptcy use significantly more negative words in their 10‐K filings than comparable vital companies. This relationship holds up until three years prior to the actual bankruptcy filing. With our investigation, we confirm the results from previous accounting and finance research. 10‐K filings contain valuable information beyond the reported financials. Additionally, we show that 10‐Ks filed in the year of a firm's collapse contain an increased number of litigious words relative to healthy businesses. This indicates that the management of failing firms is already dealing with legal issues when reporting financials prior to bankruptcy. Our results suggest that analysts ought to include the presentation of financials in their assessment of bankruptcy risk as it contains explanatory and predictive power beyond the financial ratios.     

Inter-firm linkages and the wealth effects of financial distress along the supply chain

Extant research examines the extent to which bankruptcy has intra-industry valuation consequences. This study broadens the investigation by examining the wealth effects of distress and bankruptcy filing for suppliers and customers of filing firms. On average, important wealth effects occur prior to and at bankruptcy filings and extend beyond industry competitors along the supply chain. Specifically, distress related to bankruptcy filings is associated with negative and significant stock price effects for suppliers. Supplier wealth effects are more negative when intra-industry contagion is more severe. We also investigate the importance of industry structure, specialized product nature, and leverage on supply chain effects.     

Strategic Bankruptcies and Price Reactions to Bankruptcy Filings

This study investigates whether the stock market differentiates between firms that file bankruptcy petitions for strategic reasons and firms that file bankruptcy petitions for financial reasons. We perform both univariate and regression tests on a sample of 245 firms that filed Chapter 11 bankruptcy petitions between 1981 and 1996. After controlling for bankruptcy outcome, probability of bankruptcy, firm financial condition, and firm size, we find that, in the period around bankruptcy filing, firms that file bankruptcy petitions for financial reasons have significantly larger stock price declines than firms that file bankruptcy petitions for strategic reasons.     

Bankruptcy as an Auction Process: Lessons from Sweden

The traditional U.S. Chapter 11 bankruptcy process in which financial claims are renegotiated under court protection and the firm continues to operate under existing management has long been criticized by economists as an inefficient way of dealing with financially distressed companies. In this paper, the authors make the case for a mandatory auction bankruptcy system of the kind now used in Sweden—one that requires all companies filing for Chapter 11 to be sold in open auctions soon after the filing. After discussing the notable features of and differences between the U.S. and Swedish bankruptcy systems, the authors summarize recent research (much of it their own) on the benefits and possible drawbacks of the Swedish system. Among the most notable findings of this research, there is no evidence that mandatory bankruptcy auctions in Sweden lead to “fire‐sale” discounts in auction premiums. Moreover, the fact that three‐quarters of the Swedish companies that filed for bankruptcy survived as going concerns should allay concerns that an auction system will produce excessive liquidations. At the same time, the post‐bankruptcy operating profitability of the companies that emerge from Swedish auctions as going concerns tends to be on a par with that of their (non‐bankrupt) industry peers. Such post‐operating performance, when combined with a 75% rate of reorganization (versus liquidation), suggests that allowing auction investors—instead of the bankruptcy court—decide which companies survive and how they get capitalized and restructured has been quite effective in accomplishing the two aims of a bankruptcy system: (1) preserving intact all economically viable enterprises while (2) eliminating the excess capacity that results from prolonging the existence of companies that are never expected to earn high enough returns on capital to attract private investment. Consistent with these findings, the U.S. in recent years has seen a sharp increase in the use of auctions in Chapter 11 bankruptcies, though on a voluntary rather than a mandatory basis. Such a change reflects the growing recognition of the role of auction processes in reducing bankruptcy costs and preserving going‐concern values as U.S. capital market participants push harder for private workouts, “prepackaged” Chapter 11 filings, and auction sales in Chapter 11.     

Predicting Bankruptcy Resolution

This study examines classification and prediction of the bankruptcy resolution event. Filing of bankruptcy is resolved through one of three alternative resolutions: acquisition, emergence or liquidation. Predicting the final bankruptcy resolution has not been examined in the prior accounting and finance literature. This post-bankruptcy classification and prediction of the final resolution is harder than discriminating between healthy and bankrupt firms because all filing firms are already in financial distress. Motivation for predicting the final resolution is developed and enhanced. A sample of 237 firms filing for bankruptcy is used. Classification and prediction accuracies are determined using a logit model. A ten-variable, three-group resolution logit model, which includes five accounting and five non-accounting variables is developed. The model correctly classifies 62 percent of the firms, significantly better than a random classification. We conclude that non-accounting data add relevant information to financial accounting data for predicting post bankruptcy resolution. Further, public policy implications for investors, researchers, bankruptcy judges, claimants and other stakeholders are discussed.     

试论个人破产与财务管理

本首先探讨了个人破产的历史渊源，然后论述我国当前实施自然人破产制度的必要性，再次提出完善和发展我国个人破产制度的具体对策，最后，探讨个人破产过程中的相关财务问题。     

Consumer durables and risky borrowing: The effects of bankruptcy protection

There exist substantial differences in the generosity of bankruptcy protection across U.S. states. This paper exploits cross-state variation in exemption levels to assess the dual role of durable goods as informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The generosity of bankruptcy protection is found to change both the incentives and the ability of households to accumulate durable wealth. The gains from a high level of insurance are reduced by the effect of tighter credit constraints, so that the net effects of a change in exemption are very small. A more generous bankruptcy regulation reduces net durable wealth in the first half of the life cycle. In addition, the optimal level of exemption is positive but low.     

Bad news does not always travel fast: evidence from Chapter 11 bankruptcy filings

This paper examines the stock price performances of 275 non‐financial, non‐utility U.S. industrial firms that continue trading on the main exchanges after filing for Chapter 11 bankruptcy between 1 October 1979 and 17 October 2005. This paper identifies a negative and statistically significant post‐bankruptcy drift that lasts for at least 6 months. This finding adds to the literature showing that the market is unable to process bad public news events in a timely manner. Further analysis suggests that the theoretical model proposed by Hong and Stein (1999) can be used to help explain this market‐pricing anomaly.     

台湾《消费者债务清理条例》评析及对大陆出台个人破产制度的展望

随着中国大陆地区社会主义市场经济体制的确立和深化,无论是在法律制度的设计上还是广大群众的观念接受程度,都需要一定的磨合期,再加上城乡二元结构的差异,使得中国大陆在个人破产制度的推动上难度较大。本文尝试借鉴台湾经验,期望对未来中国大陆个人破产制度的增修作一比较参考,使整体市场退出机制更加完善。     

Is Chapter 11 Efficient?

The efficiency of the Chapter 11 bankruptcy process is examined by estimating the impact of Chapter 11 filings on the operating performance of bankrupt firms. We control for firm‐level heterogeneity in prefiling characteristics using matching methods to select benchmark firms comparable to filing firms. We compare bankrupt firms’ operating performances with those of matched nonbankrupt firms. Our results challenge the contention that Chapter 11 is an inefficient, debtor‐friendly mechanism that rehabilitates economically nonviable firms. We demonstrate that firms that file under Chapter 11 perform no worse and, if anything, better than comparable nonfiling firms.