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International Review of Law and Economics
International Review of Law and Economics
Article history: Debt-to-equity conversion is a commonly used legal tool for financial restructuring of ailing businesses, yet systematic
Received 14 May 2019 evidence on the consequences of debt-to-equity conversion for firm outcomes is scarce. Drawing on a novel dataset of
Received in revised form 5 August 2019 bankruptcy reorganizations from Slovenia and exploiting variation in the incidence of debt-to-equity conversion across firms,
Accepted 4 November 2019 Available online
we provide the first empirical analysis of the role of debt-to-equity conversion in bankruptcy reorganization as a determinant
13 November 2019
of post-bankruptcy firm survival. To address endogeneity concerns, we use a plethora of controls and fixed effects, quantify
the sensitivity of our estimates to selection on unobservables, and rely on instrumental variable methods. We find that debt-to-
JEL classification:
equity conversion is robustly negatively associated with prospects of post-bankruptcy firm failure. Our findings provide a
G33
G32 novel input into ongoing debates about the appropriate design of corporate bankruptcy institutions.
K22
L25
© 2019 Elsevier Inc. All rights reserved.
Keywords:
Corporate bankruptcy
Debt-to-equity conversion
Financial reorganization
Firm survival
https://doi.org/10.1016/j.irle.2019.105878
0144-8188/© 2019 Elsevier Inc. All rights reserved.
2 J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
signal that the distressed business is especially cash-strapped, an event that about the determinants of post-bankruptcy firm outcomes in other
can adversely affect the firm’s market valuation. Finally, the debtor bears the jurisdictions, even though the design of corporate bankruptcy insti-tutions has
organizational and financial expenses asso-ciated with DEC. For all these been at the heart of policy debates across the globe (see, e.g., European Law
reasons, how exactly DEC affects post-bankruptcy firm outcomes is 1
Institute, 2017; Cirmizi et al., 2012; Claessens et al., 2001; Hart, 2006).
ultimately an empirical ques-tion. Importantly, to our knowledge, regard-less of the examined jurisdiction, no
contribution to date has investigated the consequences of DEC during in-court
In the present paper, we follow this line of reasoning to empir-ically bankruptcy reorganization proceedings for post-bankruptcy firm outcomes.
investigate the relationship between DEC in bankruptcy reorganization and
the prospects of post-bankruptcy firm failure. To this end, we draw on a Our paper takes a step toward filling these gaps in the litera-ture by
newly assembled dataset of bankruptcy reorganizations from Slovenia, a post- offering the first empirical scrutiny of DEC in bankruptcy reorganization as a
socialist EU member state where business bankruptcy has been a much determinant of post-bankruptcy firm survival. With regard to the scope of our
debated policy topic since early transition (see, e.g., Gray and Stiblar 1993). inquiry, we utilize a novel, fine-grained dataset on bankruptcy reorganization
In Slove-nia, DEC in bankruptcy organization has been legally possible since plans and firms from a comparatively under-researched jurisdiction that has
late 1990s. A comprehensive 2008 reform of insolvency legislation solidified deliber-ately modeled its corporate bankruptcy reorganization framework after
DEC as a restructuring tool used in bankruptcy reorgani-zation practice by U.S. Chapter 11. Given the often considerable similarity of bankruptcy
articulating and refining the key procedural rules of DEC. However, not all reorganization frameworks across countries, especially those that have
firms pursuing bankruptcy reorganization since 2008 have opted for DEC. We attempted to emulate the U.S. insolvency legis-lation (see, e.g., Wessels,
exploit the resulting uneven implementation of DEC across bankrupt firms to 2011; Eidenmüller, 2016; Warren and Westbrook, 2009: 625), we would
examine the role of DEC as a determinant of post-bankruptcy firm survival. expect our findings to extend well beyond the Slovenian borders.
Methodologically, our analysis advances the existing research on predictors of
post-bankruptcy firm outcomes by explicitly attempting to address issues of
Given the existence of variation in DEC across bankrupt firms, the key causal-ity.
challenge in estimating the effect of DEC on post-bankruptcy firm survival
stems from the possibility that the creditors’ decision to pursue DEC is
systematically related to unob-served firm characteristics that also affect the The rest of the paper is organized as follows. The next section provides a
firm’s prospects of post-bankruptcy survival. To tackle the corresponding brief institutional background on Slovenian bankruptcy reorganization
endogeneity concerns, we utilize multiple empirical approaches and proceedings and the corresponding legal framework for conversion of debt to
estimation methods. The detailed nature of our data facilitates the inclusion of equity. Subsequent sec-tions introduce our data, develop our empirical
a plethora of controls and fixed affects. In a subset of our analysis, we rely on methodology, and present the results. The final section concludes.
recently developed methods to quantify the sensitiv-ity of our estimates to
unobserved heterogeneity (Oster, 2017). Finally, we estimate our models
using instrumental variable-based approaches, in an attempt to isolate the
exogenous part of variation in the occurrence of DEC across firms. The
application of instru-mental variable methods in addition allows us to directly 2. Corporate bankruptcy reorganization and debt-to-equity conversion
test the appropriateness of the assumption of exogeneity of our focal DEC in Slovenia
indicator.
2.1. The Slovenian corporate bankruptcy framework
We find that DEC is associated with reduced prospects of post-bankruptcy Following the fall of socialism and the breakup of Yugoslavia, the features
firm failure (or, equivalently, increased prospects of post-bankruptcy firm and the evolution of the Slovenian corporate bankruptcy framework have been
survival). This finding is robust to alterna-tive model specifications and substantially inspired by the existing west-ern models, especially the U.S.
estimation approaches and is not driven by selection on unobservables. The bankruptcy legislation. Accordingly, Slovenia utilizes a system of corporate
use of instrumental vari-able techniques further indicates that, conditional on bankruptcy proceedings where the initial decision between liquidation versus
the full set of included controls, we cannot reject the assumption of exogene- reorgani-zation is made by the initiator of the proceedings (the debtor or
ity of our focal regressor. The resultant analysis indicates that our estimates of creditors) rather than the court, as is the case in Germany or France (see, e.g.,
the effect of DEC on post-bankruptcy performance may even be consistent Cepec, 2014). The resolution of firms’ financial distress through bankruptcy
with a causal interpretation. Our analy-sis thereby provides support in favor reorganization in particular has been explic-itly modeled after the U.S.
of the use of DEC as a means to restructuring of financially distressed but Chapter 11 (see, e.g., Plavsak,ˇ 2014: 20; Cepec and Kovac,ˇ 2016: 90). As a
economically viable businesses. result, subject to a few rel-atively minor differences elaborated on below, the
core procedural and substantive features of the Slovenian bankruptcy
reorganiza-tion proceedings, including the possibility of DEC, closely
More generally, our paper adds to and bridges two broad strands of the resemble those of U.S. Chapter 11 and Chapter 11-emulated frameworks used
literature. The first is the voluminous literature on cor-porate financial internationally.
restructuring (see, e.g., Gilson 2010; Bowman and Singh, 1993; Bowman et
al., 1999). Within this literature, the consequences of DEC for firm outcomes
have been com-paratively underexplored. This is in particular true with regard
to the repercussions of DEC that takes place within the for-mal bankruptcy
framework, that is, in firms already pursuing bankruptcy reorganization. The
second strand constitutes the lit-erature on post-bankruptcy firm performance.
Research on firms emerging from bankruptcy reorganization has focused 1 For studies of post-bankruptcy performance of firms in countries other than the U.S., see,
predomi-nantly on publicly traded U.S. firms (e.g., Alderson and Betker, e.g., Couwenberg (2001), Leyman et al. (2011), Leyman (2012), Fattah et al. (2016), Kwak et al.
(2016), Collett et al. (2014). For micro-level empirical analyses of the functioning of corporate
1999; Bandopadhyaya and Jaggia, 2001; LoPucki and Doherty, 2015; bankruptcy regimes in jurisdictions outside of the U.S. more generally, see, e.g., García-Posada
Hotchkiss et al., 2008; Barniv et al., 2002; Denis and Rodgers, 2007; Gómez and Sánchez (2018), Barthélémy et al. (2009), Fisher and Martel (2004), Cepec and
Aivazian and Zhou, 2012, Hotchkiss, 1995). Notably less is known Grajzl (2019), Blazy et al. (2011, 2013, 2018), Blazy and Chopard (2012), Blazy and Nigam
(2019), Blazy and Letaief (2017), Dewaelheyns and Van Hulle (2009), Laitinen (2011),
Bergström et al. (2004), and Sundgren (1998).
J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
We focus on the period after the passage of the 2008 legisla-tion that laid legally mandated to confirm a plan that has received support from the required
2 creditor majority and is legally precluded from con-firming a reorganization
the foundation of present-day insolvency resolution. Subsequent legal
amendments, in particular those implemented in 2013, updated specific plan that was not accepted by the required creditor majority. The court thus
provisions of the 2008 law and intro-duced a further bankruptcy does not make any decisions regarding the merit and the substance of the
3 proposal, a feature that may be understood as a reflection of the legislator’s
reorganization alternative targeted at small businesses. These amendments,
however, did not alter the core structure of the corporate bankruptcy mistrust in the judiciary concerning substantive decisions involving corporate
resolution framework as envisaged in the 2008 legislation. bankruptcy.
80
with at least a three-quarter ownership stake. In the event of DEC, the
ownership share of original owners is diluted with new shares. Since a 2013
amendment, which introduced the absolute priority rule (creditors’ claims
60
must be paid first), old owners in fact automatically lose all of their claims
whenever the firm exhibits a negative working capital.
Frequency
The reorganization plan is confirmed only if creditors who are affected by
40
the plan and whose claims constitute at least 60 percent of the value of all
claims affected by the plan vote in favor of the proposed plan. In voting for or
20
against the proposed reorganization plan, the creditors who agree to DEC
8
hold a disproportionally large weight relative to other creditors. If the
proposed reorganization plan is accepted, the firm begins to execute it. The
0
automatic stay rule ceases to apply. A new bankruptcy reorganization is in 0 500 1000 1500 2000 2500 3000 3500 4000
general possible no sooner than three years after all obligations from the prior Days since completed reorganization proceedings
From the 206 firms that attempted bankruptcy reorganization, The estimates of the hazard functions and the survivor func-tions, featured
54 firms are observed surviving as a going concern. The remaining in Figs. 2 and 3, are non-parametric in that they do not incorporate any
covariates. Accordingly, Figs. 2 and 3 paint a purely descriptive picture of the
relationship between DEC and post-bankruptcy firm survival, without
addressing selection and causality. In the ensuing analysis, we address these
8 Between 2008 and 2010, the weight factor assigned to creditors who agree to DEC was
issues explicitly.
equal to two. A 2010 amendment further increased the voting weight factor
in favor of creditors who agree to DEC.
9
The Slovenian law classifies firms as micro, small, medium-sized, and large enterprises 4. Empirical methodology and results
based on employment, sales revenue, and total assets. The relatively small share of firms
classified as micro and small businesses in the data reflects the fact that from 2013, most micro
The central empirical challenge in ascertaining whether, and if so how and
and small firms have been filing for bankruptcy reor-ganization under the newly introduced
simplified reorganization procedure (see Section 2.1). to what extent, DEC in bankruptcy reorganization affects post-bankruptcy
firm survival stems from the fact that cred-
J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
Table 1
Descriptive statistics.
itors’ decision to convert (at least some of) their claims into equity shares in empirical approaches. In what follows, we outline each approach in turn and
the ailing business is hardly random. Specifically, if busi-nesses that present the corresponding results.
successfully convert some of the creditors’ claims into equity in general face
better survival prospects than businesses that do not convert any debt into
equity, then DEC is subject to endoge-nous selection and the patterns shown 4.1. Survival analysis: baseline approach
in Figs. 2 and 3 could arise even if DEC per se had no causal effect on post-
bankruptcy firm survival. To address the endogeneity concerns, we use As our primary approach, we estimate semiparametric Cox sur-vival
multiple models with an encompassing set of controls and fixed effects. The included
controls and fixed effects are intended to minimize the
6 J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
1.00
Column (3) shows the results when we further control for the
firm’s core financial indicators. Following an extensive empirical
With debt-to- equity conversion and references, see Altman and Hotchkiss (2006)), we include as
Table 2
Hazard ratios, Cox model.
Explanatory variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Debt-to-equity conversion 0.443*** 0.459*** 0.442*** 0.438*** 0.436*** 0.436*** 0.442*** 0.442*** 0.441*** 0.449**
Controls
Joint-stock company 1.129 1.106 1.080 1.079 1.109 1.201 1.372 1.378 1.418
Firm age (in years) 0.997 0.996 0.997 0.997 0.999 0.998 0.990 0.990 0.988
Foreign owned 0.914 0.921 0.959 0.936 0.935 0.961 0.902 0.892 0.865
Ownership concentration 1.484 1.501 1.436 1.432 1.530 1.438 1.298 1.308 1.355
Log assets 1.012 1.093 1.094 1.096 1.129 1.152 1.134 1.074
Leverage 1.074 1.090 1.094 1.094 1.104 1.149* 1.152* 1.152*
Liquidity 1.092 1.180 1.176 1.182 1.226 1.155 1.175 1.283
Return on assets 0.994 0.991 0.996 0.990 0.984 1.031 1.047 1.047
Creditor initiated proceedings 0.758 0.746 0.837 0.892 1.029 1.344 1.306
Log ordinary unsecured claims 0.981 0.976 0.949 0.954 0.937 0.957 1.001
Log priority unsecured claims 0.978 0.977 0.988 0.983 0.974 0.980 0.973
Log secured claims 1.004 1.005 1.010 1.001 0.996 0.996 1.001
Log excluded claims 1.018 1.018 1.018 1.017 1.011 1.011 1.018
Log number of creditors 0.974 0.964 0.994 0.951 1.016 0.993 0.986
Proposed % repayment of ord. 1.000 1.000 1.001 1.003 1.005 1.006 1.009
unsecured creditors
Proposed years for repayment of ord. 1.024* 1.025* 1.022 1.019 1.021 1.026* 1.029*
unsecured creditors
Estimated % repayment of ord. 0.980** 0.980** 0.980** 0.978** 0.982** 0.981** 0.978**
unsecured creditors if liquidation
Length of proceedings (in months) 0.972 0.971 0.971 0.966 0.964 0.963 0.961
Management turnover before 1.044 1.019 0.966 0.873 0.862 0.874
proceedings
Management turnover during 1.202 1.215 1.227 1.103 1.065 1.135
proceedings
Fixed effects
Industry FE No No No No No Yes Yes Yes Yes Yes
Size classification FE No No No No No No Yes Yes Yes Yes
Court FE No No No No No No No Yes Yes Yes
Trustee proceeding FE No No No No No No No No Yes Yes
Year of filing FE No No No No No No No No No Yes
Failures 152 152 152 152 152 152 152 152 152 152
Observations 206 206 206 206 206 206 206 206 206 206
Log pseudolikelihood −713.2 −712.1 −710.9 −702.7 −702.5 −700.7 −699.0 −692.8 −691.2 −688.7
Notes: The table reports hazard ratios and their statistical significance based on Cox model estimates. Hazard ratio greater (smaller) than one implies that the covariate exerts a positive (negative)
effect on firm failure hazard, where firm failure is defined as liquidation bankruptcy, further reorganization bankruptcy, or voluntary dissolution. ***,**, and * denote statistical significance at the
0.1%, 1%, and 5% level, respectively.
indicator variable is remarkably stable across specifications. The inclusion of tions contributed by firms that voluntarily dissolved are treated as right-
an encompassing set of controls and fixed effects barely changes the point censored. The results are reported in column (2) of Table 3.
estimate of interest. Based on the estimates from the preferred specification, We estimated the model after dropping reorganization cases filed after the
reported in column (10) of Table 2, rel-ative to the scenario where no DEC in 2013 amendments to insolvency legislation that, among others, enabled
bankruptcy reorganization took place, DEC in bankruptcy reorganization is creditor-initiated reorganization proceed-ings and stipulated conditions for
associated with a 56-percent decrease in firm failure hazard, all else equal. when a DEC offer must be extended. The results are reported in column (3) of
Among the remaining covariates, firm failure hazard is, as we would expect, Table 3. We estimated the model after dropping eight reorganization cases for
statistically significantly positively associated with firm’s lever-age and the which the number of creditors exceeds 1000. The dropped cases entail some
proposed length of time for repayment of ordinary unsecured creditors. Firm of the publicly most notorious insolvency cases, and thus cases for which any
failure hazard is statistically significantly negatively associated with the political interference might have been most influential. The results are
anticipated extent of repayment of ordinary unsecured creditors in the event reported in column (4) of Table 3.
of liquidation, a measure reflecting beliefs about the firm’s current worth. No
other featured control variable is a statistically significant predictor of firm We estimated a stratified Cox model as a further approach to taking into
failure hazard. account unobserved heterogeneity (Cleves et al., 2010: 197–201). In
particular, as an alternative to modeling the impact of amendments to
insolvency law and country-wide economic shocks with inclusion of year of
reorganization filing fixed effects, we allow the baseline firm failure hazard in
expression (1) to differ by the year of reorganization filing. The results are
4.2. Survival analysis: robustness checks reported in column
(5) of Table 3. Finally, we estimated a series of parametric hazard models that
To explore the sensitivity of our findings we performed several robustness give the baseline hazard a parametric representation. If the baseline hazard is
checks. Our starting point is the specification featured in column (10) of specified accurately, the parameter esti-mates based on a parametric model
Table 2. We estimated a specification where we replaced court fixed effects will generally be more precise than the estimates from the semiparametric
with the full set of judge fixed effects. The results are reported in column (1) Cox model that leaves the underlying time dependence of the hazard function
of Table 3. We estimated the model under a modified definition of post- unspecified (Cleves et al., 2010). According to the standard Akaike and
bankruptcy firm failure. Under the alternative definition of firm failure, Bayesian information criteria, the Weibull model fit our data best from all
voluntary dissolution is viewed as a competing risk event and thus observa-
8 J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
Table 3
Hazard ratios, robustness checks and alternative model specifications.
comparable parametric models. Column (6) in Table 3 therefore reports the part of ownership and control over the business. Consequently, for the debtor
results using the Weibull model. to extend a DEC offer, the bankrupt business would normally have to find
The results in Table 3 demonstrate that our findings, reported in Table 2, itself under especially dire financial circum-stances when the debtor’s
are fully robust to the conducted robustness checks. All else equal, DEC expected benefits from immediate debt relief, implied by DEC, can outweigh
during bankruptcy reorganization is statistically significantly negatively the perceived costs from loss of control. At the same time, when the debtor is
associated with post-bankruptcy hazard of firm failure. experiencing espe-cially high indebtedness, enduring losses, or acute
illiquidity, the creditors may find a proposal involving a mere reduction or/and
postponement of repayment of debt, without the possibility to acquire an
ownership share and corresponding instantaneous bal-ance sheet
4.3. Survival analysis: instrumental variable approach improvements, either unsustainable or insufficient to facilitate a successful
turning around of the business. Rejection of the reorganization proposal in
The broad set of included controls and fixed effects that we utilize in our turn results in mandatory liquida-tion of the debtor’s assets, an outcome
analysis represents our first attempt to address the problem of potentially where, at least in Slovenia, creditors typically recover at best a very small
endogenous selection of firms into DEC treatment. To probe this issue 11
portion of their claims (Cepec et al., 2017).
further, we next implement an instrumental variable approach that also allows
us to perform a direct test of exogeneity of our focal DEC regressor.
Thus, when the debtor is especially financially distressed, it is not only the
Our instrumental variable for occurrence of DEC is an indicator variable
debtor who begins to perceive DEC as a relatively appealing reorganization
that takes on the value one if in the course of reorganization proceedings the
possibility. Rational creditors, too, will at that point tend to find a
possibility of DEC had been offered to the credi-tors, and zero otherwise. The
reorganization proposal with a DEC offer comparatively more attractive,
DEC offer is normally extended by the debtor. (The exception occurs if the
thereby further increasing the debtor’s inclination to extend a DEC offer in the
reorganization proceedings are initiated by a subset of the creditors who then
first place. Importantly, to the extent that existence of a DEC offer is pre-
drive the preparation of the organization plan; the plan may include the
dominantly driven by the severity of the firm’s financial distress at the time of
presentation of a DEC offer to the remaining creditors.) Given the specifics of
bankruptcy filing—a factor that can, through hys-teresis, in turn affect the
the Slovenian bankruptcy reorganization framework during the time period
firm’s post-bankruptcy survival prospects (see, e.g., Barniv et al., 2002)—our
under consideration, existence of a DEC offer is a necessary condition for
controls for debtor’s profitabil-ity, leverage, liquidity, debt structure, and
DEC to take place. Thus, we expect the existence of a DEC offer to be highly
anticipated repayment of (ordinary unsecured) creditors in the event of
correlated with whether DEC actually took place, a conjecture readily testable
bankruptcy liquida-tion should adequately absorb the corresponding effects,
in the data.
therefore lending credibility to the assumption of validity of the exclusion
restriction.
Instrument validity, however, also rests on the inherently untestable
assumption that, once controlling for the full set of covariates and fixed
effects, whether DEC offer was extended to the creditors or not should not
While comparatively less salient on theoretical grounds, other
directly affect post-bankruptcy firm sur-vival. That is, existence of a DEC
explanations for existence of a DEC offer in a given reorganiza-tion case are
offer should affect post-bankruptcy firm survival solely through the effect on
possible as well. In particular, whether or not a DEC offer is extended in a
whether DEC actually occurred. For this exclusion restriction to hold, the
given reorganization case perhaps in part depends on the debtor’s prevailing
included con-trols and fixed effects must adequately absorb the factors that
ownership structure and leader-ship, or even reflect industry-specific norms.
influence the prospects of post-bankruptcy firm survival and, at the same
Via path dependence, governance during bankruptcy proceedings can in turn
time, play a role in the decision to extend a DEC offer. With our covariates
shape the firm’s post-bankruptcy fate, as might industry-wide economic con-
and fixed effects encoding comprehensive information about each
ditions (see, e.g., Hotchkiss, 1995; Leyman et al., 2011; Barniv et al.,
reorganization case, we view this as a tenable assump-tion.
proceedings, as well as industry fixed effects, should satisfactorily absorb the Explanatory variable (1) (2)
influence of these kinds of effects, too. Nev-ertheless, given the untestable Debt-to-equity conversion 0.847 0.872
nature of the exclusion restriction, our instrumental variable estimates should û 0.344 0.310
be interpreted appro-priately, as contingent on the underlying assumption of Controls as in column (10) of Table 2 Yes Yes
instrument validity. For this reason, in Section 4.4 we also investigate endo- Fixed effects as in column (10) of Table 2 Yes Yes
Failures 152 125
geneity using an additional, methodologically distinct approach that does not Observations 206 155
rely on an instrumental variable.
Log pseudolikelihood −686.4 −529.1
Notes: The table reports hazard ratios based on Cox model specifications analo-gous to that
We estimate the model in two stages (see Terza et al., 2008). In the first reported in column (10) of Table 2, but utilizing instrumental variable approach. Column (1)
stage, we estimate a linear probability model with debt-to-equity conversion shows results using the full sample. Column (2) shows results without reorganization filings
12 after the 2013 amendments to bankruptcy legisla-tion. û is the estimated residual from the first-
indicator, DECi , as the outcome variable. The explanatory variables
stage regression with Debt-to-equity conversion as the dependent variable. The first-stage results
include the full set of controls and fixed effects as featured in the specification
are shown in Table A2. The hazard ratios for Debt-to-equity conversion and û are statistically
in column (10) of Table 2 as well as our instrument, the indicator for whether
insignificantly different from one for both results in column (1) and results in column (2).
DEC offer had been extended to the creditors. After estimating the resulting Standard errors (not reported) used for inference are adjusted for two-step estimation and
model with ordinary least squares (OLS), we for each reorganiza-tion case i obtained using 1000 bootstrap replications.
calculate the residual, ûi , as the difference between the actual and fitted
expected value of the DEC indicator.
Table 5
Linear probability model, OLS and IV-2SLS estimates.
The last row of column (2) in Table 5 shows the results of the sensitivity
of the focal coefficient on the DEC indicator to selection on unobservables.
We report the results in the form of estimated bounds. If all omitted-variable
problems were solved, then under the two assumptions stated above, the
estimated coefficient on the DEC indicator would lie in the estimated interval
14
[−0.265, −0.176]. This is evidence in favor of the argument that DEC in
bankruptcy reorganization causes a reduction in the prospects of post-
bankruptcy firm failure. Furthermore, the bounds of the esti-mated interval lie
fully within the 95-percent confidence interval [−0.437, −0.093] implied by
our estimate of the coefficient on the DEC indicator in column (2) of Table 5.
This finding further demon-strates the robustness of our estimates to omitted
variables.
Finally, column (3) of Table 5 shows second-stage results from the IV-
2SLS estimation of model (2). The utilized instrumental variable, the
indicator of existence of a DEC offer, and hence the first-stage results and the
associated exclusion restriction caveat, are the same as reported in Section
4.3. The second-stage coefficient on the DEC indicator is negative,
statistically significant, and very similar in magnitude to that obtained using
OLS estimation (col-umn (2) of Table 5). Resonating with the findings
obtained on the basis of the application of the Oster (2017) method, which
rejects the possibility that our results could be explained by endogenous
selection on unobservables, the Wooldridge (1995) robust score and the
Hausman (1978)-style robust regression tests of endogene-ity fail to reject the
null hypothesis of regressor exogeneity (the corresponding p-values are
reported in the last row of column (3) of Table 5).
5. Conclusion
None.
Acknowledgments
Appendix A.
Table A1
Variable definitions.
Variable Definition
Days observed Number of days that firm is observed from the end of bankruptcy reorganization proceedings to
failure (liquidation, another reorganization, voluntary dissolution) or the end of observation
window.
Days observed when failure Number of days that firm is observed from the end of bankruptcy reorganization proceedings to
failure (liquidation, another reorganization, voluntary dissolution).
Days observed when no failure Number of days that (non-failing) firm is observed from the end of bankruptcy reorganization
proceedings to the end of observation window.
Failed Dummy equal to 1 if firm entered bankruptcy liquidation, began further reorganization, or
voluntarily dissolved by the end of the observation window; and 0 otherwise.
Debt-to-equity conversion Dummy equal to 1 if debt-to-equity conversion during bankruptcy reorganization proceedings
took place; and 0 otherwise.
Joint-stock company Dummy equal to 1 if firm is a joint-stock company; and 0 if firm is a limited liability company.
Firm age Firm age (in years) at the start of bankruptcy reorganization proceedings.
Foreign owned Dummy equal to 1 if share of foreign ownership in the firm is at least 0.10.
Ownership concentration Herfindal-Hirschman ownership concentration index.
Assets Firm’s total assets (in D millions).at the start of bankruptcy reorganization proceedings.
Leverage Ratio of firm’s liabilities to total assets at the start of bankruptcy reorganization proceedings.
Liquidity Ratio of the difference between firm’s total assets and inventories to liabilities at the start of
reorganization proceedings.
Return on assets Ratio of firm’s net profit to total assets at the start of bankruptcy reorganization proceedings.
Creditor initiated proceedings Dummy equal to 1 if bankruptcy reorganization proceedings were initiated by the creditors; and 0
if bankruptcy reorganization proceedings were initiated by the debtor.
Ordinary unsecured claims (in Total value of ordinary unsecured claims (in D millions).
D millions)
Priority unsecured claims (in D Total value of priority unsecured claims (in D millions).
millions)
Secured claims (in D millions) Total value of secured claims (in D millions).
Excluded claims (in D millions) Total value of excluded claims (in D millions).
Number of creditors Total number of creditors as established at the start of bankruptcy reorganization proceedings.
Proposed % repayment of ord. Proposed percent of repayment of ordinary unsecured creditors based on conventional
unsecured creditors reorganization plan.
Proposed years for repayment Proposed years of repayment of ordinary unsecured creditors based on conventional
of ord. unsecured creditors reorganization plan.
Estimated % repayment of ord. Estimated percent of repayment of ordinary unsecured creditors in the event of liquidation.
unsecured creditors if
liquidation
Length of proceedings Length of bankruptcy reorganization proceedings (in months).
Management turnover before Dummy equal to 1 if firm experienced management turnover up to one year prior to the start of
proceedings bankruptcy reorganization proceedings; and 0 otherwise.
Management turnover during Dummy equal to 1 if firm experienced management turnover during bankruptcy reorganization
proceedings proceedings; and 0 otherwise.
Debt-to-equity conversion Dummy equal to 1 if debt-to-equity conversion offer was presented in bankruptcy reorganization
offer proceedings; and 0 otherwise.
Notes: The table presents variable definitions for the variables for which we present descriptive statistics (Table 1). Regressions include additional sets of fixed effects (see Tables 2–5, and A2). The
source of data are AJPES records on bankruptcy reorganizations and firms’ financials (see Section 3.3).
12 J. Cepec, P. Grajzl / International Review of Law and Economics 61 (2020) 105878
Table A2
First-stage results for the estimates in Table 4 and column (3) of Table 5.
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