Building Legal Indexes to Explain Recovery Rates : An Analysis of the French and UK Bankruptcy Codes

We test the characteristics of bankruptcy procedures that are likely to generate recoveries for the creditors. We build 132 original legal indexes accounting for the main functions of bankruptcy law that were highlighted by Hart (2000). Namely, we measure the accessibility of the procedure, their ability to disclose information, the level of protection of the debtor's assets, the coordination of the claimants and their decision power under bankruptcy, and the sanction of faulty management. We show that the French procedures are more protective of the debtor's assets and favor more the coordination of claims. In UK, we find strong opposition between the liquidation and the reorganization procedures: the former ones prioritize the protection of secured claims, while unsecured creditors benefit from higher decision power under the latter ones. We then use an original database of 833 French and UK bankrupt SMEs to measure the recovery rates that are generated by each procedure. We first isolate the bankruptcy rules that are associated to higher recovery rates: namely, accessibility of the procedure, protection of the debtor's assets, protection and coordination of claims. On the contrary, information disclosure under bankruptcy has negative impact on total recoveries, probably due to the breach in confidentiality