Bankruptcy around the World: Explanations of Its Relative Use

The law and finance literature highlights the role of investor rights in financial development, firm corporate governance, and financing patterns. For a panel of 35 countries, we investigate how bankruptcy use relates to countries' creditor rights and judicial efficiency. Bankruptcies are higher in countries with more creditor rights, except for a "no automatic stay on assets" provision. Higher judicial efficiency is associated with more bankruptcies and appears as a substitute with more creditor rights. Although only a first step, our findings suggest creditor rights are complex, balancing prioritization of claims, ex ante risk-taking incentives, and an efficient resolution of distressed firms. Copyright 2005, Oxford University Press.