Essays on Personal Bankruptcy Law and Small Business Financing PDF Download

Author: John Hackney
Publisher:
ISBN:
Category : Credit
Languages : en
Pages : 118

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Book Description
In the first chapter of my dissertation I ask whether and how debtor protection affects aggregate small business credit quantity. Using comprehensive data on the number and amount of small business loans granted by commercial banks, and employing a robust difference-in-difference empirical design utilizing staggered shocks to personal bankruptcy exemptions, I find that increases in debtor protection increase the equilibrium quantity of small business credit in local regions. This finding is statistically significant and robust, despite competing demand and supply effects. I find that an average change in the homestead exemption results in a 1.1% increase in the number of small business loans in a local area (census tract), and a 2.5% increase in the total volume. The increase in quantity is concentrated in areas with presumably higher risk aversion and higher wealth, as predicted by the wealth insurance and collateral channels, respectively, and where local banks are better able to determine borrower type. These findings add depth to previous literature on debtor protection and small business financing that finds a tightening of credit terms, and suggest a greater role of the wealth insurance properties of personal bankruptcy law in determining aggregate small business credit quantity. In the second chapter, I ask how soft information affects the average organizational structure in local banking markets. I utilize the same staggered changes in state-level personal bankruptcy exemptions as exogenous shocks to the primary information frictions facing small business lenders: adverse selection and moral hazard. I find that an average increase in exemptions reduces the average distance between borrowers and lender headquarters, where presumably high-level capital allocation decisions are made, by 2.8-3.7%. I find that this result is weaker where social and cultural factors are likely to lessen the scope for moral hazard. Additionally, I find that areas whose bank branch headquarters are more distantly located experience adverse small business outcomes following exemption increases. These results are consistent with theories of soft information and organizational structure where flatter organizations maintain an information advantage over their hierarchical peers, and suggests that information frictions play a prominent role in shaping the competitive landscape of local markets by reducing competition from outsiders.

Author: Edward R. Morrison
Publisher:
ISBN:
Category :
Languages : en
Pages : 6

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Book Description
This essay summarizes four papers: “Bargaining Around Bankruptcy: Small Business Distress and State Law,” 38 Journal of Legal Studies 255 (2009); “Bankruptcy's Rarity: An Essay on Small Business Bankruptcy in the United States,” 5 European Company & Financial Law Review 172 (2008); “Small Business Bankruptcy and the Bankruptcy Abuse and Consumer Protection Act of 2005,” A Report to the United States Small Business Administration (2007); and Douglas G. Baird & Edward R. Morrison, “Serial Entrepreneurs and Small Business Bankruptcies,” 105 Columbia Law Review 2310 (2005).

Author: Mohammad Mahdi Fahimi
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 0

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Book Description
This dissertation consists of two essays in financial economics. The first essay, included in Chapter 2, concerns the effect of debtor-in-possession (DIP) financing and DIP financing lenders on the outcome of Chapter 11 bankruptcy. When firms file for protection under Chapter 11 bankruptcy, their access to outside financing will be limited. The Bankruptcy Reform Act of 1978 has resolved this issue under section 364 of the US Bankruptcy Code by defining laws for the DIP financing, which is the unique type of financing available to firms filing for Chapter 11 bankruptcy. DIP financing is usually senior to all other securities issued by a firm and violates the absolute priority rule by standing ahead of a company’s existing debts for payment. Among the characteristics of DIP financing, limited attention has been given to the type of lender of the DIP financing. There is not much empirical evidence on whether financing a DIP loan from different types of lenders can lead to different bankruptcy outcomes. In this essay, I investigate the role of DIP financing, especially the DIP lender in the bankruptcy process. I provide evidence for the role of DIP lender, bank versus non-bank, in bankruptcy outcome, while controlling for potential endogeneity of the lender’s type. In order to control for the endogeneity of the DIP lender type, I use an instrumental variable (IV) approach. My results show that even after controlling for the endogeneity of the lender type, the source of the DIP loan still matters for the outcome of the bankruptcy process. More specifically, receiving the DIP loan from banks increases the likelihood of emerging from bankruptcy as a going concern for the bankrupt firm. The second essay, included in Chapter 2, concerns predicting bankruptcy outcome using a machine learning approach and using the bankruptcy outcome predictions to predict firms’ CDS spreads. First, I develop a machine learning model using Extreme Gradient Boosting to predict the outcome of the bankruptcy. I compare the performance of this model with that of a traditional logistics regression model and show that, while both perform well, the machine learning model outperforms the traditional model, mainly because it is able to identify non-linear patterns in the data. I, then, use the predicted probabilities of emerging from bankruptcy, combined with the predicted probabilities of bankruptcy, produced by a second machine learning model, to predict CDS spreads. I show that the predicted probability of bankruptcy and probability of emerging from bankruptcy can be used to predict firms’ CDS spreads and can improve the prediction power of benchmark models. This study contributes to the bankruptcy and bankruptcy outcome prediction literature by providing empirical evidence of the association between a firm’s characteristics and its bankruptcy outcome. I also show that using machine learning techniques to predict the bankruptcy outcome can help predict CDS spreads more accurately.

Author: John Schwartz
Publisher: Penguin
ISBN: 0399576819
Category : Business & Economics
Languages : en
Pages : 322

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Book Description
A New York Times correspondent shares his financial successes and mishaps, offering an everyman's guide to straightening out your money once and for all. Money management is one of our most practical survival skills—and also one we've convinced ourselves we're either born with or not. In reality, financial planning can be learned, like anything else. Part financial memoir and part research-based guide to attaining lifelong security, This Is the Year I Put My Financial Life in Order is the book that everyone who has never wanted to read a preachy financial guide has been waiting for. John Schwartz and his wife, Jeanne, are pre-retirement workers of an economic class well above the poverty line, but well below the one percent. Sharing his own alternately harrowing and hilarious stories—from his brush with financial ruin and bankruptcy in his thirties to his short-lived budgeted diet of cafeteria french fries and gravy—John will walk you through his own journey to financial literacy, which he admittedly started a bit late. He covers everything from investments to retirement and insurance to wills (at fifty-eight, he didn't have one!), medical directives and more. Whether you're a college grad wanting to start out on the right foot or you're approaching retirement age and still wondering what a 401(K) is, This Is the Year I Put My Financial Life in Order will help you become your own best financial adviser.

Author: Vyacheslav Mikhed
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 185

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Book Description
This thesis consists of four chapters. Chapter 1 tests the hypothesis that income shocks cause bankruptcy. Using a difference-in-difference specification, we exploit an exogenous fiscal payment, paid to Albertans, and find that this payment causes a decrease in bankruptcies, as predicted by the income shock hypothesis. Using insolvent's balance sheet data, we find that the financial benefits of bankruptcy (liabilities discharged minus wealth forgone) are higher for those filers who received the payment. This is consistent with those potential filers, with smaller advantages from bankruptcy, being dissuaded from filing by the payment. Chapter 2 examines the effect of income inequality on debt and financial distress. Following the 2008 crisis, several authors have argued that growing inequality increases debts of the poor, who attempt to match the consumption of the rich; and that these debts lead to bankruptcy. We test this argument using a unique database of essentially every personal bankruptcy filing in Canada from 2005 to 2010. Our main finding is that increased income inequality is associated with higher levels of debt in bankruptcy; in particular, larger unsecured and credit card debt and increased risk of bankruptcy. Chapter 3 explores the impact of the distance between filers and bankruptcy professionals on bankruptcy filing costs. We test if longer distances between debtors and their closest bankruptcy professionals, implying higher transactions costs, lead to debtors demanding larger financial benefits from their bankruptcy to make the bankruptcy worthwhile. We show that distance related costs are particularly important in rural areas, where distances to the closest bankruptcy professionals are typically large. Chapter 4 examines the impact of government policies on US mortgage foreclosures. Before the 2008 financial crisis, the US government encouraged mortgage lending to low income borrowers designated as a special 'under-served' group by the Community Reinvestment Act. We explore whether this law influenced mortgage foreclosures in 2003-2010. We exploit the 80 percent threshold discontinuity embedded in the law to identify the causal effect of the law on foreclosures. We find that regions with relatively faster and less expensive non-judicial foreclosure process experienced an increase in foreclosures due to the Community Reinvestment Act.

Author: David A. Skeel Jr.
Publisher: Princeton University Press
ISBN: 1400828503
Category : Business & Economics
Languages : en
Pages : 296

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Book Description
Bankruptcy in America, in stark contrast to its status in most other countries, typically signifies not a debtor's last gasp but an opportunity to catch one's breath and recoup. Why has the nation's legal system evolved to allow both corporate and individual debtors greater control over their fate than imaginable elsewhere? Masterfully probing the political dynamics behind this question, David Skeel here provides the first complete account of the remarkable journey American bankruptcy law has taken from its beginnings in 1800, when Congress lifted the country's first bankruptcy code right out of English law, to the present day. Skeel shows that the confluence of three forces that emerged over many years--an organized creditor lobby, pro-debtor ideological currents, and an increasingly powerful bankruptcy bar--explains the distinctive contours of American bankruptcy law. Their interplay, he argues in clear, inviting prose, has seen efforts to legislate bankruptcy become a compelling battle royale between bankers and lawyers--one in which the bankers recently seem to have gained the upper hand. Skeel demonstrates, for example, that a fiercely divided bankruptcy commission and the 1994 Republican takeover of Congress have yielded the recent, ideologically charged battles over consumer bankruptcy. The uniqueness of American bankruptcy has often been noted, but it has never been explained. As different as twenty-first century America is from the horse-and-buggy era origins of our bankruptcy laws, Skeel shows that the same political factors continue to shape our unique response to financial distress.

Author: Cesar E. Tamayo
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 96

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Book Description
This dissertation investigates the role that capital market imperfections play in shaping the behavior of firms along several dimensions: capital structure, investment policies, bankruptcy decisions and life-cycle dynamics. The dissertation puts together two separate but closely related papers, both of which are concerned with bankruptcy and firm financing under asymmetric information and limited enforcement. In Chapter 2, I present a model of firm finance that encompasses imperfect investor protection, risk aversion and costly state verification. Imperfect investor protection is introduced through the limited liability clause of the financial contract, and captures the maximum fraction of returns that the investor can seize from the entrepreneur. A positive lower bound on consumption then interacts with entrepreneurial risk aversion in non-trivial ways. I characterize optimal contracts and study the conditions under which standard debt is optimal. Under suitable assumptions about the structure of the problem, standard debt contracts (SDCs) are optimal if and only if investor protection is sufficiently low. On the other hand, low investor protection results in higher funding costs and bankruptcy probabilities. In my setting, this implies that when SDCs are optimal, lowering investor protection reduces the entrepreneur's welfare. Numerical examples show that moderate changes in investor protection can have large effects on the terms of the contract and on the entrepreneur's welfare. Finally, I study the role of leverage and consider the welfare consequences suboptimally implementing standard debt contracts. In Chapter 3 I study firm dynamics and industry equilibrium when firms under financial distress face a non-trivial choice between alternative bankruptcy procedures. Given limited commitment and asymmetric information, financial contracts specify default, renegotiation and reorganization policies. Default occurs in equilibrium and leads to either liquidation or renegotiation. Renegotiation entails a redistribution of social surplus, while reorganization takes the form of enhanced creditor monitoring. Firms with better contract histories are less likely to default, but, contingent on default, firms with better outside options successfully renegotiate, in line with the empirical evidence. Unless monitoring is too costly, renegotiation leads to reorganization, which resembles actual bankruptcy practice. I calibrate the model to match certain aspects of the data on bankruptcy and firm dynamics in the U.S. My counterfactual experiments show that, compared with an economy with liquidation only, the rehabilitation of firms (renegotiation and reorganization) has a sizable negative effect on exit rates and size dispersion, and positive effects on average size and productivity.

Author: Mary Eschelbach Hansen
Publisher: University of Chicago Press
ISBN: 022667973X
Category : Business & Economics
Languages : en
Pages : 237

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Book Description
In 2005, more than two million Americans—six out of every 1,000 people—filed for bankruptcy. Though personal bankruptcy rates have since stabilized, bankruptcy remains an important tool for the relief of financially distressed households. In Bankrupt in America, Mary and Brad Hansen offer a vital perspective on the history of bankruptcy in America, beginning with the first lasting federal bankruptcy law enacted in 1898. Interweaving careful legal history and rigorous economic analysis, Bankrupt in America is the first work to trace how bankruptcy was transformed from an intermittently used constitutional provision, to an indispensable tool for business, to a central element of the social safety net for ordinary Americans. To do this, the authors track federal bankruptcy law, as well as related state and federal laws, examining the interaction between changes in the laws and changes in how people in each state used the bankruptcy law. In this thorough investigation, Hansen and Hansen reach novel conclusions about the causes and consequences of bankruptcy, adding nuance to the discussion of the relationship between bankruptcy rates and economic performance.

Author: Jason Damm
Publisher:
ISBN:
Category :
Languages : en
Pages : 45

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Book Description
In the U.S., individual parties who file for bankruptcy can exempt a certain dollar amount of property from creditor liquidation during the debt settlement process. We examine the effect of changes to these protection laws on bank lending to small businesses. Our results indicate that additional debtor protection, brought about by changes to bankruptcy laws, significantly reduces the amount of credit issued by banks to small businesses. We find that this impact is more severe for small businesses located in census tracts with low income levels and that our results are largely driven by lending in urban areas.

Author: Martin Shubik
Publisher: MIT Press
ISBN: 9780262693110
Category : Business & Economics
Languages : en
Pages : 472

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Book Description
This first volume in a three-volume exposition of Shubik's vision of "mathematical institutional economics" explores a one-period approach to economic exchange with money, debt, and bankruptcy. This is the first volume in a three-volume exposition of Martin Shubik's vision of "mathematical institutional economics"--a term he coined in 1959 to describe the theoretical underpinnings needed for the construction of an economic dynamics. The goal is to develop a process-oriented theory of money and financial institutions that reconciles micro- and macroeconomics, using as a prime tool the theory of games in strategic and extensive form. The approach involves a search for minimal financial institutions that appear as a logical, technological, and institutional necessity, as part of the "rules of the game." Money and financial institutions are assumed to be the basic elements of the network that transmits the sociopolitical imperatives to the economy. Volume 1 deals with a one-period approach to economic exchange with money, debt, and bankruptcy. Volume 2 explores the new economic features that arise when we consider multi-period finite and infinite horizon economies. Volume 3 will consider the specific role of financial institutions and government, and formulate the economic financial control problem linking micro- and macroeconomics.