Tha Bankruptcy: A Case Study

Liquidation is a procedure under which a court-appointed administrator is responsible to shut down the bankrupt company and dispose its assets. White (1982) finds the liquidation inefficient, due to several drawbacks it entails. For example, creditor claims have no flexibility in their fulfillment. If a creditor claim cannot be satisfied in full, it will not be satisfied at all. Moreover, managers of a failing company may try to delay the liquidation falsely to save their positions. This fact has to be taken into account by creditors ex-ante, since in the ex-ante perspective such incentives tend to increase the cost of bankruptcy and therefore lead to protective adjustments in the loan terms so that debtors are worse off. Generally, in the ex-ante perspective, liquidation is considered a favorable option for creditors. This allows creditors to satisfy their claims without long delays and further losses assets’ values of companies if they eventually face financial hardships. Moreover, some scholars argue

Considering a pre-bankruptcy horizon, we can observe some economic inefficiencies in decision making regarding a corporate bankruptcy. One of those inefficiencies arises when a company has credit relations with multiple creditors. That way, bankruptcy law addresses no only the debtor-creditor conflicts, but also deals with a so-called creditor coordination problem, also known as “common pool problem” among lawyers. This problem means a conflict of interests among several debt holders (Ernst-Ludwig von Thadden, Berglöf, and Roland, 2010; Jenkins and Smith, 2014). Multiple bank relations are a common practice in developed countries. Rodano et al. (2016) provide a data showing that the median number of creditors, a company in Italy is debt-financed by, is equal to four. Ernst-Ludwig von Thadden, Berglöf, and Roland (2010) also argue that companies tend to prefer two or more creditors over one while seeking for external