Banking

Personal Bankruptcy: Reconciling Adverse Events And Strategic Timing Hypotheses Using Heterogeneity In Filing Types

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Executive Summary

The strategic timing and adverse events hypotheses of personal bankruptcy have received particular attention. Existing research focuses on proving or disproving either hypothesis, using a strict interpretation of the role of financial benefit in the filing decision. Using a more realistic framework in which financial benefit may affect the filing decision in both hypotheses, the authors show that endogeneity of financial benefit is a distinguishing factor between the two hypotheses. Using two different datasets, they show that the endogeneity test favors the adverse events hypothesis. Extending the analysis to allow for both types, they find evidence of heterogeneity in filing types, consistent with both hypotheses.

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