Determinants of the Choice of Formal Bankruptcy Procedure: An International Comparison of Reorganization and Liquidation

Application of a logit regression model to 555 bankruptcy filings from 30 countries from 1993 to 2009 provides insight into the factors that determined the outcomes of two formal bankruptcy resolution procedures, reorganization, and liquidation. The evidence shows that the judicial efficiency of debt enforcement had greater effects on the reorganization choice than the formalism on debtor rights written in the law books had. A higher bank debt ratio did not necessarily favor liquidation over reorganization, and creditors relied on the future value of the viable firm and judicial efficiency to decide between reorganization and liquidation. The results highlighted that the bankruptcy code and its enforceability efficiency were the causes of the variability in formal bankruptcy outcomes.