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Bankruptcy and insolvency can be a complex and challenging issue for corporations and their stakeholders. Effective bankruptcy and insolvency laws can play an important role in promoting economic growth and stability, in addition to providing a valuable mechanism for protecting creditors' rights and ensuring that bankrupt firms are restructured in a way that maximizes value for all stakeholders. Academic research can provide valuable insights into various aspects of corporate bankruptcy and its intersection with corporate governance. Insolvency regimes vary widely across countries, and the role of the court in the insolvency process can have a significant impact on outcomes for stakeholders, including creditors and shareholders. Differences in insolvency laws and accounting standards across countries can affect the behavior of firms and investors, and the quality of financial information available to stakeholders. The presence of limited liability can affect the behavior of managers and investors in distressed firms, and can have implications for the allocation of value between shareholders and creditors in insolvency proceedings. Corporate governance practices, including board composition, CEO turnover, and ownership structure, can have an impact on the likelihood of a firm entering insolvency and its ability to restructure successfully. Internal controls and audit quality can play a role in determining the likelihood of financial distress and insolvency for firms, and can affect the ability of stakeholders to detect and respond to financial problems.

Research can highlight how the role of bankruptcy affects the behavior of managers, shareholders, and creditors. It can examine the impact of insolvency procedures on contractual networks, or the relationship between bankruptcy and the market for corporate control, or the impact of government expropriation on firms that go private, a process that is often used by firms to avoid bankruptcy. It can espouse the development of a "rescue culture" that prioritizes the rehabilitation of financially distressed firms as essential for promoting economic growth and stability, or that legal frameworks should be reformed to better align the incentives of governments and private creditors. It can indicate that firms that exit bankruptcy are less likely to engage in innovation activities than similar firms that do not experience financial distress.

It can examine the treatment of employee financial participation, or the relationship between bankruptcy law and entrepreneurship, or the impact of debt restructuring on firm investment, or how bankruptcy affects the cost of organizational capital, or the impact of bankruptcy law on the cost of credit, on workers' rights, or on the wider economy, with a particular focus on the spillover effects on other firms, or it can assess the efficiency of bankruptcy law by analyzing the survival rates of firms that experience financial distress,

Studies can claim that while common law systems tend to prioritize the interests of creditors in insolvency proceedings, civil law systems are more likely to take into account the interests of other stakeholders, including employees and the community, or that bankruptcy can have negative effects on the credit and investment decisions of other firms, and that these effects can be particularly severe for firms that are closely connected to the bankrupt firm, or that the tax treatment of debt can have a significant impact on the outcome of bankruptcy proceedings. It can argue that debtor-in-possession (DIP) financing can be a powerful tool for creditors to exert control over bankrupt firms, and explores the potential conflicts of interest that can arise among creditors, or that the restructuring of patent assets can play an important role in facilitating innovation in bankrupt firms.

To find out what the research tells us, explore the many papers in our series:

Queries, suggested inclusions and other ideas?

Julian Franks
Professor of Finance
London Business School

Working Papers


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