Banking

Business Cycles And The Bankruptcy Code: A Structural Approach

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Executive Summary

The authors develop a structural equilibrium model with business cycles and use it to examine the economic implications of voluntary filing for bankruptcy. They find that conflict of interests that arises from the voluntary filing option of causes higher ex-ante losses in firm value in recessions than in booms. These costs amount to approximately 5% of the ex-ante value for a BAA-rated representative firm and are twice as large as those produced by a model that does not allow for business cycle fluctuations. They relate these economic costs to firm fundamentals and to long-run economic uncertainty.

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