Essays on corporate default process: UK and France

The thesis has been conducted upon a unique and primary database manually collected through courts and various reliable sources (governmental and non-governmental offices). This is the major strength of this thesis. With such a database, we built individual statistics on the corporate bankruptcies process in for two major European countries (France and United Kingdom). The collected data deals with the causes of financial default, the recovery rates of creditors, the process of decision making at the time of default, the efficiency of such decisions, etc. Such research project helps in distinguishing the origins of corporate financial default: are they independent from the national bankruptcy code or not? In order to test the effect of legal environment, we computed the most comprehensive legal indexes till date. Our legal indexes consist of more than 300 questions that explain the particular function of bankruptcy. We merge these indexes with the hand collected database for France and UK. This makes this thesis really unique as it is composed of original hand collected databases. To the best of our knowledge the UK database has no equivalence as for the first time we manage to include liquidations which constitute more than 85% of bankruptcies in UK. Even the scholars in UK lack such information.

Such empirical work is completed by a microeconomic theoretical analysis and would yield interesting results that will be discussed in detail in the rest of the chapters of the thesis and also open avenues for future research work.

Chapter 1 presents a brief introduction to the topic, explaining the research aims and research methodology.

Chapter 2 presents the detailed survey of literature on bankruptcy. It starts by explaining the basic concept associated with bankruptcy, need of bankruptcy laws, the main objective of bankruptcy, the main processes associated with bankruptcy, classification of bankruptcy regimes and the law and finance approach to understand legal environment affecting bankruptcy. It explores the previous literature and findings and provides our contribution to the pre-existing literature and justifies our research goals and our approach.
Chapter 3 empirically investigates the choice between informal and formal (court-supervised) restructuring of small and medium French firms in default. The procedure is depicted as a sequential game in which stakeholders first decide whether or not to engage in an informal negotiation. Then, conditional on opting for an informal workout, the creditors and the debtor can succeed or fail in reaching an agreement in order to restructure the firm’s capital structure. Based on a sample of 735 credit lines allocated to 386 French distressed firms, we test different hypotheses which captures i) coordination vs. bargaining power issues, ii) informational problems, iii) firms’ characteristics, and iv) loan characteristics. Using a sequential LOGIT approach, we first find that the probability for opting for an informal workout i) decreases when the bank is the debtor’s main creditor and ii) increases with the size of the loan. In addition, the likelihood of success of an informal workout i) decreases when the management of a badly rated firm is considered as incompetent, and ii) decreases when the bank is the debtor’s main creditor. The result concerning the bank as being the main creditor suggests that “bargaining power” argument dominates the “coordination” argument. Finally, we find no evidence of the impact of collateral on the decision between informal and formal restructuring.

Chapter 4 describes the prevalent bankruptcy procedure of UK and France; in general it provides an entire macro view of the bankruptcy laws in given two countries. It presents the various formal and informal procedures, explains their functioning, how they are triggered and the underlying specificities about each process. It is very crucial to understand the working of each procedure as this forms the basis for the future chapters where we related the result of our summary statistics and econometrics to specificities of these procedure and come up with useful conclusions and insights.

In chapter 5 the focus returns to the micro economic analysis. We explore the two unique hand coded databases, collected through different sources. Our database consists of 264 small and medium sized enterprises representing France and 564 small and medium sized enterprises representing UK. These countries represent two major legal systems prevailing in Europe: common law and civil law. Both legislations have features that are of interest for research. Based on are datasets we provide summary statistics on both the countries. Our descriptive statistics explains the average profile of our sample company, it provides us with the reasons that lead the company into bankruptcy, it provides us the detailed asset and liability structures of the firms and the detailed claim structure and recovery structure. In addition it also provides us with the duration of the procedure and the costs involved in the process. We also perform multivariate analysis to test the choice between continuation and liquidation for France and to test the factors that increase or decrease the chances of receivership (procedure made for the benefits of banks) and administration (regarded as reorganization procedure) in UK.

The main aim of the chapter 6 is to find the legal characteristics that impact on the recovery rates. Previous studies (LLSV, Doing Business Report, World Bank) have usefully used a set of legal indexes to rank the bankruptcy law prevalent within the country. But they fail to identify the characteristics of bankruptcy procedures that create more recoveries. We give here elements of answer by taking into consideration two countries that are good representatives of the two main legal systems prevailing in Europe: France (Civil Law) and United Kingdom (Common Law). To enable this, we built original legal indexes comprising of 158 binary questions that highlight ten major dimensions of corporate bankruptcy procedures: (1) accessibility, (2) exclusivity, (3) bankruptcy costs, (4) production of information, (5) protection of the debtor’s assets, (6) protection of claims, (7) coordination of creditors, (8) decision power, (9) sanction of faulty management, and (10) inclination towards liquidation / reorganization. We then propose a mapping of procedures that shows a clear specialization between them. The French procedures (“redressement judiciaire” and “liquidation judiciaire”) are more protective of the debtor’s assets and favor more the coordination of secured claims, public claims, and unsecured claims. In UK, we find strong opposition between the procedures oriented to liquidation and the other procedures.