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Bruno Funchal - One of the best experts on this subject based on the ideXlab platform.
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the brazilian Bankruptcy Law experience
Web Science, 2012Co-Authors: Aloisio Araujo, Rafael V X Ferreira, Bruno FunchalAbstract:Abstract In early 2005, the Brazilian Congress approved a new Bankruptcy Law. The new legislation increased creditor protection and improved the efficiency of the Bankruptcy system. This paper evaluates the empirical consequences of a Bankruptcy reform on a poorly developed credit market. Using data from Brazilian and non-Brazilian firms, we estimated, using two different models, the effect of the Bankruptcy reform on contractual and non-contractual debt variables. In general, both models yielded similar results. Concerning contractual debt variables, we found a significant increase in the total amount and the long-term debt and a reduction in the cost of debt. For the non-contractual debt variable, we found no effect in the loans’ ownership structure.
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interactions between corporate governance Bankruptcy Law and firms debt financing the brazilian case
Bar. Brazilian Administration Review, 2008Co-Authors: Bruno Funchal, Fernando Caio Galdi, Alexsandro Broedel LopesAbstract:This paper examines the relationship between corporate governance level and the Bankruptcy Law for such debt variables as firms' cost of debt and amount (and variation) of debt. Our empirical results are consistent with the model's prediction. First, we find that the better the corporate governance, the lower the cost of debt. Second, we find that better corporate governance arrangements relate to firms with higher amounts of debt. Finally we find that better governance and harsher Bankruptcy Laws have a positive effect on debt. Moreover, this effect is stronger for firms with worse corporate governance, which indicates that the Law works as a substitute for governance practices to protect creditors' interests.
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Bankruptcy Law in latin america past and future
Social Science Research Network, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:"Bankruptcy Law in Latin America: Past and Future" increasingly recognizes the relevance of legal and institutional structures for the functioning and development of the economy. Bankruptcy Laws are a crucial element of such institutions. This paper examines the Laws that govern corporate Bankruptcy procedures, their effects on the economic environment, and the recent Bankruptcy reforms in Latin America, with a focus on Brazil.Firms take on debts for several reasons. They generally intend to repay these debts with their future gains, but there is always the possibility that the borrowing firms will not fulfill the repayment promise. Bankruptcy Law determines what happens in such circumstances.In the absence of a Bankruptcy Law, creditors have two legal procedures at their disposal. In the case of secured loans, creditors can seize the firm's assets that serve as collateral for their loans. In the case of unsecured loans, creditors can go to court asking to sell some of the firm's assets. This method of debt collection runs into difficulties when there are many creditors and the debtor's assets do not cover its liabilities (that is, when the firm is insolvent). Under these conditions, each creditor will try to be the first to recover its debts. This uncoordinated race of creditors may lead to the dismantling of the firm's assets and a loss of value for all creditors. It is in the collective interest of creditors, and of society at large, that the disposition of the debtor's assets be carried out in an orderly way, via a centralized Bankruptcy procedure. In a perfect world, there would be no need for a Bankruptcy Law because individuals could solve this problem through private contracts in which the debtor specified ex ante what would happen in case of default (for example, how to divide up assets and use them for debt repayment). Writing such contracts is very difficult, however. Debtors may acquire new creditors and assets after the contract is signed, and it is hard to specify how the division process should change as a function of such adjustments. Besides, contracts like this simply are not written in practice. Bankruptcy Law provides a default option for this problem of contract incompleteness.Most countries have two Bankruptcy procedures: one for liquidating the assets of failing firms and another for reorganizing failing firms. Ideally, Bankruptcy Law should provide a good balance between liquidation and reorganization procedures. When a firm files for Bankruptcy liquidation, the Bankruptcy court appoints a trustee who shuts down the firm and sells its assets. This can involve either the sale of the whole business or its productive units or the piecemeal sale of its assets, depending on demand and on which option maximizes the value of the company's assets. The absolute priority rule determines how the proceeds of sale are divided among the claimants. It specifies what claims are paid in full according to an order defined by Bankruptcy Law of each country.Reorganization is the other alternative. When capital markets are imperfect, which is very common in developing countries, the best managers may not be able to raise the necessary cash to buy the firm. The firm may therefore be inefficiently dismantled and its assets sold cheaply. Reorganization provides a good alternative for countries with weak capital markets.
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past and future of the Bankruptcy Law in brazil and latin america
Research Papers in Economics, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:This paper studies the Bankruptcy Law in Latin America, focusing on the Brazilian reform. We start with a review of the international literature and its evolution on this subject. Next, we examine the economic incentives associated with several aspects of Bankruptcy Laws and insolvency procedures in general, as well as the trade-offs involved. After this theoretical discussion, we evaluate empirically the current stage of the quality of insolvency procedures in Latin America using data from Doing Business and World Development Indicators, both from World Bank and International Financial Statistics from IMF. We find that the region is governed by an inefficient Law, even when compared with regions of lower per capita income. As theoretical and econometric models predict, this inefficiency has severe consequences for credit markets and the cost of capital. Next, we focus on the recent Brazilian Bankruptcy reform, analyzing its main changes and possible effects over the economic environment. The appendix describes difficulties of this process of reform in Brazil, and what other Latin American countries can possibly learn from it.
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Bankruptcy Law in latin america past and future
Economica, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:This paper studies Bankruptcy Law in Latin America, focusing on the Brazilian reform. We start with a review of the international literature on this subject. Next we examine the economic incentives associated with several aspects of Bankruptcy Laws and insolvency procedures in general, as well as the trade-offs involved. We follow this theoretical discussion with an empirical evaluation of the quality of current insolvency procedures in Latin America. We find that the region is governed by a set of Laws that is inefficient even when compared with regions of lower per capita income. This inefficiency has severe consequences for credit markets and the cost of capital. Next we focus on the recent Brazilian Bankruptcy reform, analyzing its main components and possible effects. The appendix describes difficulties of the reform process in Brazil and lessons other Latin American countries can learn from it.
Paolo F Volpin - One of the best experts on this subject based on the ideXlab platform.
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the political economy of personal Bankruptcy Law
Social Science Research Network, 2013Co-Authors: Vito Gala, Jodie A Kirshner, Paolo F VolpinAbstract:In this paper we study the political and economic determinants of US states' choices of homestead exemptions. We develop a political economy model in which homestead exemptions are ex-post beneficial to borrowers who default (because they shield some of their wealth from creditors) but ex-ante costly to all borrowers (because they increase borrowing costs). Assuming that state residents vote on homestead exemptions, we predict that states with higher levels of income inequality adopt higher levels of homestead exemptions. We test this prediction for three sample periods: cross-sectional data for 1975 and for 1860, and panel data over the 1978-2005 period. Across these three samples, we find evidence consistent with the prediction of the model. Our findings are robust to controls for other differences across states, including state fixed effects (in the panel regressions).
Aloisio Araujo - One of the best experts on this subject based on the ideXlab platform.
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the brazilian Bankruptcy Law experience
Web Science, 2012Co-Authors: Aloisio Araujo, Rafael V X Ferreira, Bruno FunchalAbstract:Abstract In early 2005, the Brazilian Congress approved a new Bankruptcy Law. The new legislation increased creditor protection and improved the efficiency of the Bankruptcy system. This paper evaluates the empirical consequences of a Bankruptcy reform on a poorly developed credit market. Using data from Brazilian and non-Brazilian firms, we estimated, using two different models, the effect of the Bankruptcy reform on contractual and non-contractual debt variables. In general, both models yielded similar results. Concerning contractual debt variables, we found a significant increase in the total amount and the long-term debt and a reduction in the cost of debt. For the non-contractual debt variable, we found no effect in the loans’ ownership structure.
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Bankruptcy Law in latin america past and future
Social Science Research Network, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:"Bankruptcy Law in Latin America: Past and Future" increasingly recognizes the relevance of legal and institutional structures for the functioning and development of the economy. Bankruptcy Laws are a crucial element of such institutions. This paper examines the Laws that govern corporate Bankruptcy procedures, their effects on the economic environment, and the recent Bankruptcy reforms in Latin America, with a focus on Brazil.Firms take on debts for several reasons. They generally intend to repay these debts with their future gains, but there is always the possibility that the borrowing firms will not fulfill the repayment promise. Bankruptcy Law determines what happens in such circumstances.In the absence of a Bankruptcy Law, creditors have two legal procedures at their disposal. In the case of secured loans, creditors can seize the firm's assets that serve as collateral for their loans. In the case of unsecured loans, creditors can go to court asking to sell some of the firm's assets. This method of debt collection runs into difficulties when there are many creditors and the debtor's assets do not cover its liabilities (that is, when the firm is insolvent). Under these conditions, each creditor will try to be the first to recover its debts. This uncoordinated race of creditors may lead to the dismantling of the firm's assets and a loss of value for all creditors. It is in the collective interest of creditors, and of society at large, that the disposition of the debtor's assets be carried out in an orderly way, via a centralized Bankruptcy procedure. In a perfect world, there would be no need for a Bankruptcy Law because individuals could solve this problem through private contracts in which the debtor specified ex ante what would happen in case of default (for example, how to divide up assets and use them for debt repayment). Writing such contracts is very difficult, however. Debtors may acquire new creditors and assets after the contract is signed, and it is hard to specify how the division process should change as a function of such adjustments. Besides, contracts like this simply are not written in practice. Bankruptcy Law provides a default option for this problem of contract incompleteness.Most countries have two Bankruptcy procedures: one for liquidating the assets of failing firms and another for reorganizing failing firms. Ideally, Bankruptcy Law should provide a good balance between liquidation and reorganization procedures. When a firm files for Bankruptcy liquidation, the Bankruptcy court appoints a trustee who shuts down the firm and sells its assets. This can involve either the sale of the whole business or its productive units or the piecemeal sale of its assets, depending on demand and on which option maximizes the value of the company's assets. The absolute priority rule determines how the proceeds of sale are divided among the claimants. It specifies what claims are paid in full according to an order defined by Bankruptcy Law of each country.Reorganization is the other alternative. When capital markets are imperfect, which is very common in developing countries, the best managers may not be able to raise the necessary cash to buy the firm. The firm may therefore be inefficiently dismantled and its assets sold cheaply. Reorganization provides a good alternative for countries with weak capital markets.
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past and future of the Bankruptcy Law in brazil and latin america
Research Papers in Economics, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:This paper studies the Bankruptcy Law in Latin America, focusing on the Brazilian reform. We start with a review of the international literature and its evolution on this subject. Next, we examine the economic incentives associated with several aspects of Bankruptcy Laws and insolvency procedures in general, as well as the trade-offs involved. After this theoretical discussion, we evaluate empirically the current stage of the quality of insolvency procedures in Latin America using data from Doing Business and World Development Indicators, both from World Bank and International Financial Statistics from IMF. We find that the region is governed by an inefficient Law, even when compared with regions of lower per capita income. As theoretical and econometric models predict, this inefficiency has severe consequences for credit markets and the cost of capital. Next, we focus on the recent Brazilian Bankruptcy reform, analyzing its main changes and possible effects over the economic environment. The appendix describes difficulties of this process of reform in Brazil, and what other Latin American countries can possibly learn from it.
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Bankruptcy Law in latin america past and future
Economica, 2005Co-Authors: Aloisio Araujo, Bruno FunchalAbstract:This paper studies Bankruptcy Law in Latin America, focusing on the Brazilian reform. We start with a review of the international literature on this subject. Next we examine the economic incentives associated with several aspects of Bankruptcy Laws and insolvency procedures in general, as well as the trade-offs involved. We follow this theoretical discussion with an empirical evaluation of the quality of current insolvency procedures in Latin America. We find that the region is governed by a set of Laws that is inefficient even when compared with regions of lower per capita income. This inefficiency has severe consequences for credit markets and the cost of capital. Next we focus on the recent Brazilian Bankruptcy reform, analyzing its main components and possible effects. The appendix describes difficulties of the reform process in Brazil and lessons other Latin American countries can learn from it.
Ori Sharon - One of the best experts on this subject based on the ideXlab platform.
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the Bankruptcy Law safe harbor for derivatives a path dependence analysis
Washington and Lee Law Review, 2014Co-Authors: Steven L Schwarcz, Ori SharonAbstract:Table of ContentsI. Introduction 1716II. Background 1718III. The Concept of Path Dependence 1721A. Defining Path Dependence 1721B. Legal Path Dependence 1722IV. Evolution of the Bankruptcy-Law Safe Harbor for Derivatives 1724A. The 1978 Bankruptcy Code 1724B. The 1982 Amendment 1727C. The 1984 Amendment 1728D. The 1990 Amendment 1729E. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 1731F. The Financial Netting Improvements Act of 2006 1736V. Is the Derivatives Safe Harbor Path Dependent? 1737VI. Reassessing the Derivatives Safe Harbor 1742A. Does Market Concentration Justify the Safe Harbor? 1743B. Is the Safe Harbor Focused on the Right Parties? 1746C. Possible Unintended Consequences 1747VII. Conclusions 1753I. IntroductionBankruptcy Law in the United States, which serves as an important precedent for the treatment of derivatives under insolvency Law worldwide,2 provides unique protections to creditors in derivatives transactions. Unlike other creditors of a debtor,3 derivatives counterparties have special rights and immunities in the Bankruptcy process, including virtually unlimited enforcement rights against the debtor (hereinafter, the "safe harbor"). This Article shows that these rights and immunities accreted over time, primarily due to industry lobbying and without a systematic and rigorous vetting of the consequences.This type of legislative accretion process is not uncommon. It is a form of path dependence-a process in which the outcome is shaped by its historical path. Because the resulting legislationin our case, the safe harbor-is not fully vetted, its significance and utility should not be taken for granted.This Article first provides background on U.S. Bankruptcy Law and derivatives transactions.4 Thereafter, it explains the concept of path dependence, including legal path dependence.5 The Article then reviews the evolution of the safe harbor for derivatives6 and shows why that evolution has been largely path dependent.7 Finally, the Article reviews the scholarship that substantively engages the merits of the safe harbor.8 That scholarship suggests there is a serious question whether the benefits of the safe harbor exceed its costs, and that the safe harbor may even have unintended harmful consequences.II. BackgroundBroadly speaking, Bankruptcy Law, which in the United States is governed by the federal Bankruptcy Code,9 favors derivatives (including repurchase agreements) counterparties in three main ways.10 Most prominently, it allows derivatives counterparties to exercise their contractual enforcement remedies against a debtor or its property-including closing out, netting, and setting off their derivatives positions and liquidating collateral in their possession-notwithstanding the automatic stay of enforcement actions.11 Secondly, Bankruptcy Law exempts derivatives counterparties from the so-called "[trustee-]avoiding powers," such as preference rules and constructively fraudulent transfers, regarding any payments and collateral received prior to the Bankruptcy.12 For example, a derivatives counterparty that receives a preferentially large repayment from an insolvent debtor shortly before the debtor's Bankruptcy will not have to return it.13 Lastly, Bankruptcy Law allows derivatives counterparties to enforce Bankruptcy-termination ipso facto clauses14 and to net all existing derivatives contracts with the debtor.15 This effectively exempts derivatives contracts from a debtor's ability to terminate unfavorable contracts.16To fully grasp the significance of these exemptions, we must first discuss the rationales underlying Bankruptcy Law's debtor protections. …
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the Bankruptcy Law safe harbor for derivatives a path dependence analysis
Social Science Research Network, 2013Co-Authors: Steven L Schwarcz, Ori SharonAbstract:U.S. Bankruptcy Law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers — whether in the United States or abroad — should not automatically assume, based on its existence, that the safe harbor necessarily reflects the most appropriate treatment of derivatives transactions under Bankruptcy and insolvency Law or the treatment most likely to minimize systemic risk.
Todd J Zywicki - One of the best experts on this subject based on the ideXlab platform.
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the past present and future of Bankruptcy Law in america
Social Science Research Network, 2003Co-Authors: Todd J ZywickiAbstract:This essay reviews David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in America. Although nominally a book about the history of Bankruptcy Law in America, Skeel's book is a comprehensive analysis of the past, present, and future of Bankruptcy Law in America. Skeel divides the history of Bankruptcy Law in America into three historical stages: the Nineteenth Century, the era of the 1898 Bankruptcy Act and the Great Depression, and the modern era of the 1978 Bankruptcy Code. As Skeel notes, the shape of Bankruptcy Law and practice throughout American history is at least as much a factor of political considerations and influence as economic considerations. To develop his point, Skeel draws on the fields of public choice and social choice, both of which apply the assumptions and tools of economics to the study of political science. Skeel uses these tools to shape his narrative, giving his argument an analytical edge that prior historical studies of American Bankruptcy Law have lacked. In particular, American Bankruptcy Law can be understood as resulting from the clash of three sets of interests: pro-debtor ideological interests (often spearheaded by Law professors), creditors, and Bankruptcy professionals (including Bankruptcy judges). Although the outcome of this three-way struggle is unclear at any given moment, the dominant course of evolution of American Bankruptcy Law has been towards increasingly-generous Bankruptcy Laws that provide strong incentives for both individual and corporate debtors to file Bankruptcy. Building on Skeel's insights, I then offer my own impressions of the current debate over the Bankruptcy reform act as well as the future of Bankruptcy Law in America. Although largely explained by the factors identified by Skeel, the current debate over the Bankruptcy reform act has introduced a new element to the traditional debate - an ideology of personal responsibility ushered in by the Republican takeover of Congress in 1994 that has offset the traditional dominance of prodebtor ideology. At the same time, the Bankruptcy system has become sufficiently unbalanced in a prodebtor direction that creditors have been able to overcome the collective action problems that have undermined prior reform efforts. These historical developments have made Bankruptcy reform possible, unlike reform efforts in the past. With respect to the future of Bankruptcy Law, this essay argues that the likely result will be global convergence on efficient Bankruptcy Laws. Building on prior work demonstrating convergence on efficient corporate Law rules in the American federal system, this essay argues that globalization will drive a similar convergence on efficient Bankruptcy Laws. This will encourage countries with excessively prodebtor Laws, such as the United States, to adopt less-generous Laws; it should also induce European countries to loosen their Laws so as to encourage greater entrepreneurship and risk-taking.
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Bankruptcy Law as social legislation
Texas Review of Law and Politics, 2001Co-Authors: Todd J ZywickiAbstract:I. INTRODUCTION Bankruptcy Law is generally thought of as being purely economic in nature.1 For corporate Bankruptcy Law, this generalization is largely correct, as corporate Bankruptcy is grafted onto a preexisting framework of limited liability corporation Law. For consumer Bankruptcy Law, however, this belief conceals the realization that Bankruptcy Law is also, if not primarily, social legislation.2 When individuals file for Bankruptcy, they obtain relief from debts incurred or have their debts entirely forgiven. Essentially, this process creates a system of legalized post-contractual opportunism.3 This post-contractual opportunism is justified in large part by the moral judgment that an honest but unfortunate debtor should be entitled to a discharge of debts.4 Although some recent scholars have examined the moral foundations of consumer Bankruptcy Law, these discussions focus almost exclusively on the moral foundations of the fresh start and ignore the larger moral and social issues raised by Bankruptcy Law.5 Bankruptcy Law is not just economic legislation, but social legislation that establishes "how far individuals should be expected to go on carrying responsibilities that have grown onerous."6 This article examines the idea of Bankruptcy Law as social legislation, investigating the implicit moral and social judgments embedded in Bankruptcy Law and in the recent arguments over the propriety of Bankruptcy reform legislation. II. THE MORAL CONSEQUENCES OF Bankruptcy Individual Bankruptcy has been morally condemned throughout most of human history. Debtor's prisons, for example, remained the dominant response to Bankruptcy through most of the world until recent times.7 The severity of the moral and legal condemnation traditionally associated with Bankruptcy reflects the gravity of the act. In part, this morality reflects the fact that for most of human history, and during the formative period of both our psychological makeup and most major religious codes, individuals lived in static economies.8 Wealth was a fixed pool that could be redistributed, but there was no sense in which wealth could be invested, thereby generating greater social wealth in the future.9 As a result, there was also no sense in which money could be borrowed and lost in an entrepreneurial activity designed to increase wealth.10 Borrowing was purely a short-term transfer from the lender to the borrower and the borrower was expected to repay it. A debtor therefore had no good explanation for why he might later be unable to repay the loan. The failure to do so was therefore traditionally considered a form of fraud or theft, punishable by similarly severe sanctions.11 A legal discharge of debts through Bankruptcy did not exist. In a static economy, the idea of charging interest was condemned as making money off money.12 It was viewed as a zero-sum redistribution from debtor to creditor just as Bankruptcy was seen as a zero-sum redistribution from creditor to debtor. Only when the concept of economic progress and the understanding of investment and capital growth became established did the idea of charging interest become morally acceptable.13 Given the modern appreciation of investment as the source of economic growth, it is understandable why Bankruptcy is taken for granted in the context of business investment. Although Bankruptcy may now be acceptable in the business context, Bankruptcy remains suspect in many countries and legal systems as a remedy for individuals.14 The opprobrium of Bankruptcy is easy to understand. Incurring a debt creates a contractual and moral obligation to repay that debt. The failure to repay a debt usually exposes the debtor to severe legal sanctions. Today, default entitles a lender to seize the debtor's nonexempt property in satisfaction of the debt.15 In addition to legal obligations and sanctions, borrowing imposes various moral obligations, whether self-imposed or enforced by society. …
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Bankruptcy Law as Social Legislation
SSRN Electronic Journal, 2001Co-Authors: Todd J ZywickiAbstract:Bankruptcy Law is generally thought of as being purely economic in nature. But personal Bankruptcy is also a form of post-contractual opportunism that reflects a moral decision to allow an individual to repudiate a promise of repayment. Thus, the Bankruptcy decision is fraught with moral significance regarding promise-keeping and reciprocity. Reciprocity, it is argued, is the cornerstone of a free economy, healthy civil society, and democratic governance. Rampant personal Bankruptcy, it is argued, frays these bonds of reciprocity that are necessary for a free, responsible, and self-governing society.
