Some analyses of designs for efficient bankruptcy proceedings based on empirical studies from the viewpoint of the microeconomics theory

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This project empirically investigated effects caused by revise of bankruptcy laws in Japan. The legal system for bankruptcy processing includes various rules that restrict the rights of creditors during the process of bankruptcy proceedings. Since any alterations to these rules would change the incentives for those involved in bankruptcy processing, the stance on legal bankruptcy procedures also differs to that before the system was amended. In Japan, recently, major revisions of bankruptcy laws were made, that is to say, the enforcement of the Civil Rehabilitation Law in April 2000 and the amendment of the Corporation Reorganization Law in 2003. The Civil Rehabilitation Law is strongly influenced by procedures in Chapter 11 of the US Bankruptcy Code, and is meant to guarantee the effectiveness of corporate reconstruction. Making the legal system more advantageous to debtors could contribute to improvements in efficiency. For example, under DIP, the existing management team could be al … More lowed to remain and could be given incentives to start the reconstruction of their companies through bankruptcy proceedings before the company's value is significantly damaged.This paper attempts an analysis on such effects caused by the introduction of the Civil Rehabilitation Law. Firstly, the possibility of the efficiency improvement is analyzed through focusing on abnormal operating performance before filing for legal bankruptcy proceedings. The results confirmed that, after the enforcement of the Civil Rehabilitation Law in April 2000, financially distressed firms file for legal bankruptcy proceedings earlier than before the enforcement of the law. Secondly, using the technique of an event study, we focused on the share price changes of main banks at the time when legal procedures were applied for. The results of the event study indicates that, at least, the main banks enjoyed the effects of improved efficiency caused by the revisions of bankruptcy laws together with more rigor bank inspections by the supervisory authority.Thirdly, we investigated banks' behavior as a large lender of financially distressed firms. The results of analysis indicates that in cases where the leading creditor bank's amount of loans to the debtor was high, a debt relief agreement would be reached in a way favorable to the shareholders of the debtor company with portions of risks against additional financial loss transferred from the debtor to its leading creditor bank. Less