Personal bankruptcy costs: Their relevance and some estimates |
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| Institution: | 1. Finance Department, Boston College, Carroll School of Management, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA;2. Economics and Finance Department, LUISS Guido Carli University, Viale Romania 32, Rome 00100, Italy;3. Economics Department, Boston College, Economics Department, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA;1. Division of Business and Management, Beijing Normal University-Hong Kong Baptist University United International College, Zhuhai, China;2. Department of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, China;1. ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading RG6 6BA, UK;2. John Madejski Centre for Reputation, Henley Business School, UK |
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| Abstract: | The paper argues that there is a need for the formal treatment of personal bankruptcy costs in the finance literature. The need arises out of the relevance of such costs to both corporate and personal financing decisions. We show that (a) personal bankruptcy costs (like personal taxes) are relevant to the corporate capital structure problem and that (b) differential bankruptcy costs across corporations and individuals can result in a clientele model of individual investment-borrowing decision which could lead to institutional arrangements designed to minimize combined bankruptcy costs. Further, we develop a theory of personal bankruptcy and a set of testable hypothesis with regard to their costs. Some preliminary estimates of personal bankruptcy costs are reported which suggest that they are higher than corporate bankruptcy costs. There is also some evidence of economics of scale in personal bankruptcy costs. |
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