Bankruptcy Costs and the Design of Preventive Restructuring Procedures

This paper measures the indirect costs of public Court-supervised bankruptcy filings in France. Due to self-fulfilling expectations, these indirect costs are likely all the more serious when the track-record of the bankruptcy procedure is poor. We take advantage of the coexistence of two Court-supervised debt-restructuring bankruptcy procedures that yield radically different results in term of firm survival. Our identification strategy relies on the heterogeneity in Commercial Courts' decisions to convert cases from the preventive restructuring procedure to the more common one. Using an (almost) exhaustive sample of bankruptcy filings in France over the 2010-2016 period, we show that conversion to the worst procedure reduces the probability of firm survival by 60 pp. This corresponds to an indirect cost of bankruptcy of between 20% and 30% of firm assets. We discuss the lessons that can be drawn for the design of preventive restructuring bankruptcy procedures. JEL Classification : G33, K22