Too Much of A Good Thing? The Impact of the a New Bankruptcy Law in Canada
A new, more debtor-friendly bankruptcy law in Canada is associated with a tenfold increase in the proportion of insolvent firms choosing reorganization over liquidation. Comparing before-and-after samples of randomly-selected firms, we find that firms reorganizing under the new law are smaller and weaker with a capital structure exhibiting significantly higher tax claims. Reflecting the bargaining power shift towards debtors, we find the new law is also associated with 25% lower creditor recovery rates and a longer time in reorganization. Unintended effects of the new law include a possible increased government role in financing small businesses and an incentive for secured creditors to favour bankruptcy over other forms of distress resolution.
FISHER, T.C.G. et MARTEL, J. (2015). Too Much of A Good Thing? The Impact of the a New Bankruptcy Law in Canada. Finance, 36(2), pp. 37-66.