Bankruptcy procedures in the post-transition economies

  • Régis BlazyEmail author
  • Nicolae Stef


In the absence of well-developed financial markets, bankruptcy procedures provide useful mechanisms to ease and organize the capital transfers of distressed businesses. From an investor’s perspective, such court-supervised ways of solving financial distress are part of the attractiveness of the post-transition economies that eventually integrated the European Union. This article originally analyzes the content of bankruptcy files handled by the courts operating in three Eastern European countries: Hungary, Poland, and Romania. Our approach mostly focuses on the two fundamental issues that bankruptcy courts must solve when the question of repayments arises: (1) maximizing and (2) sharing the debtor’s value. We first find that the investors’ recovery power strongly depends on the local rules prevailing after bankruptcy filing (legal indexes) and on the type of procedure engaged (reorganization vs. liquidation). Second, total recoveries do not benefit from the presence of public claims suggesting some passivity from the state, in the context of post-transition. Conversely, junior creditors exert a positive influence on total recoveries despite their poor legal protection, which contrasts with secured creditors (confirming the bad incentives that collaterals may generate). In addition, as in Western Europe, the Eastern European bankruptcy systems provide stronger protection for private secured claims than for public claims.


Bankruptcy Recoveries Legal indexes Transition economies 

JEL classification

G33 K22 P34 



We are grateful to the journal’s reviewers. This article is a revised version of a paper presented at EALC 2018, EALE 2017, SFA 2015, MFS 2015, EFMA 2015, Infiniti 2015, AFFI 2015, SIDE-ISLE 2014. This research was financed by ANR (EURODEF program). We thank our network, the judges, liquidators, and administrators involved in the data collection process. Any remaining errors are ours.


  1. Ahlering, B., & Deakin, S. (2007). Labor regulation, corporate governance, and legal origin: A case of institutional complementarity? Law & Society Review,41(4), 865–908.CrossRefGoogle Scholar
  2. Alexopoulos, M., & Domowitz, I. (1998). Personal liabilities and bankruptcy reform: An international perspective. International Finance,1(1), 127–159.CrossRefGoogle Scholar
  3. Armour, J., Hsu, A., & Walters, A. J. (2008). Corporate insolvency in the United Kingdom: The impact of the Enterprise Act 2002. European Company and Financial Law Review,5, 135–158.CrossRefGoogle Scholar
  4. Ayotte, K. (2006). Bankruptcy and entrepreneurship: The value of a fresh start. The Journal of Law, Economics, & Organization,23(1), 161–185.CrossRefGoogle Scholar
  5. Ayotte, K., & Morrison, E. (2009). Creditor Control and Conflict in Chapter 11. Journal of Legal Analysis,1(2), 511–551.CrossRefGoogle Scholar
  6. Baird, D. (1986). The uneasy case for corporate reorganizations. Journal of legal studies,15, 127–147.CrossRefGoogle Scholar
  7. Baird, D. (1991). The initiation problem in bankruptcy. International Review of Law and Economics,11, 223–232.CrossRefGoogle Scholar
  8. Baird, D., & Bernstein, D. (2005). Absolute priority, valuation uncertainty and the reorganization bargain. Yale Law Journal,115, 1930.CrossRefGoogle Scholar
  9. Balcerowicz, E., Hashi, I., Lowitzsch, J., & Szanyi, M. (2003). The development of insolvency procedures in transition economies: a comparative analysis. CSER Working Paper,254, 35. Scholar
  10. Bebchuk, L. (2000). Using options to divide value in corporate bankruptcy. European Economic Review,44, 829–843.CrossRefGoogle Scholar
  11. Bebchuk, L. (2002). Ex ante costs of violating absolute priority in Bankruptcy. Journal of Finance,57, 445–460.CrossRefGoogle Scholar
  12. Begg, D., & Portes, R. (1993). Enterprise debt and financial restructuring in Central and Eastern Europe. European Economic Review,37, 396–407.CrossRefGoogle Scholar
  13. Berglöf, E., & Claessens, S. (2006). Enforcement and good corporate governance in developing countries and transition economies. The World Bank Research Observer,21(1), 123–150.CrossRefGoogle Scholar
  14. Blazy, R., Boughanmi, A., Chopard, B., & Letaief, A. (2018a). Analyse économique du droit de la faillite: les dix fonctions des procédures collectives. Revue d’Economie Financière, no,1, 117–160.CrossRefGoogle Scholar
  15. Blazy, R., & Chopard, B. (2004). Ex-post efficiency of bankruptcy procedures: a general normative framework. International Review of Law and Economics,24(4), 447–471.CrossRefGoogle Scholar
  16. Blazy, R., Chopard, B., & Nigam, N. (2013). Building legal indexes to explain recovery rates: an analysis of the French and English bankruptcy codes. Journal of Banking & Finance,37(6), 1936–1959.CrossRefGoogle Scholar
  17. Blazy, R., Petey, J., & Weill, L. (2018b). Serving the creditors after insolvency filings: from value creation to value distribution. European Journal of Law and Economics,45(2), 331–375.CrossRefGoogle Scholar
  18. Breen R. (1996). Regression models: Censored, sample selected or truncated data. In Quantitative applications in social sciences (Vol. 111, p.88)Google Scholar
  19. Briggs, D. (2004). Causal inference and the Heckman model. Journal of Educational & Behavioral Statistics,29(4), 397–420.CrossRefGoogle Scholar
  20. Bris, A., Welch, I., & Zhu, N. (2006). The costs of bankruptcy: Chapter 7 liquidation versus chapter 11 reorganization. Journal of Finance,61(3), 1253–1303.CrossRefGoogle Scholar
  21. Claessens, S., & Klapper, L. (2005). Bankruptcy around the world: Explanations of its relative use. American Law and Economics Review,7(1), 253–283.CrossRefGoogle Scholar
  22. Coase, R. (1960). The problem of social cost. Journal of Law and Economics,3, 1–44.CrossRefGoogle Scholar
  23. Cornelli, F., & Felli, L. (1997). Ex-ante efficiency of bankruptcy procedures. European Economic Review,41, 475–485.CrossRefGoogle Scholar
  24. Couwenberg, O., & de Jong, A. (2008). Costs and recovery rates in the Dutch liquidation-based bankruptcy system. European Journal of Law and Economics,26, 105–127.CrossRefGoogle Scholar
  25. Daigle, K., & Maloney, M. (1994). Residual claims in bankruptcy: an agency theory explanation. Journal of Law and Economics,37(1), 157–192.CrossRefGoogle Scholar
  26. Davydenko, S., & Franks, J. (2008). Do bankruptcy codes matter? A study of defaults in France, Germany, and the U.K. Journal of Finance,63(2), 565–608.CrossRefGoogle Scholar
  27. Delaney, K. (1992). Strategic bankruptcy: How corporations and creditors. California: University of California Press.Google Scholar
  28. Djankov, S., Hart, O., Mc Liesh, C., & Shleifer, A. (2008). Debt enforcement around the World. Journal of Political Economy,116(6), 1105–1149.CrossRefGoogle Scholar
  29. Earle, J., & Telegdy, A. (2002). Privatization methods and productivity effects in Romanian industrial enterprises. Journal of Comparative Economics,30, 657–682.CrossRefGoogle Scholar
  30. Eberhart, A., & Senbet, L. (1993). Absolute priority rule violations and risk incentives for financially distressed firms. Financial Management,22(3), 101–116.CrossRefGoogle Scholar
  31. Enriques, L. (2002). Do corporate law judges matter? Some evidence from Milan. European Business Organization Law Review,3(4), 765–821.CrossRefGoogle Scholar
  32. Falke, M. (2003). Insolvency law reform in transition economies. Dissertation, de Verlag im Internet.Google Scholar
  33. Fisher, T., & Martel, J. (2015). Too much of a good thing? The impact of a new bankruptcy law in Canada. Finance,36(2), 37–66.CrossRefGoogle Scholar
  34. FNR. (2010). Banks, Financial Markets, and Legislations—PLAFILOI research program, Luxembourg School of Finance, Fonds National de la Recherche Luxembourg, report n°06/31/17.
  35. Franks, J., & Torous, W. (1994). A comparison of financial recontracting in distressed exchanges and Chapter 11 reorganizations. Journal of Financial Economics,35, 349–370.CrossRefGoogle Scholar
  36. Gray, C. W., Hanson, R. J., & Ianachkov, P. G. (1992). Romania’s evolving legal framework for private sector development. American University International Law Review,7(3), 9.Google Scholar
  37. Grunert, J., & Weber, M. (2009). Recovery rates of commercial lending: empirical evidence for German companies. Journal of Banking & Finance,33, 505–513.CrossRefGoogle Scholar
  38. Harris, M., & Raviv, A. (1991). Capital structure and the informational role of debt. Journal of Finance,45, 321–350.CrossRefGoogle Scholar
  39. Hart, O. (2006). Different approaches to bankruptcy. CESifo DICE report, IFO Institute for economic research,4(1), 3–8.Google Scholar
  40. Haselmann, R., Pistor, K., & Vig, V. (2005). Creditor rights and banking behavior: Evidence from transition economies. EFA Moscow Meetings June 2005. Scholar
  41. Hashi, I. (1995). The economics of bankruptcy, reorganisation and liquidation: lessons for East European transitional economies. CSER Working Paper, May 1995, p. 30.
  42. Heckman, J. (1979). Sample selection bias as a specification error. Econometrica,47, 153–161.CrossRefGoogle Scholar
  43. Hogan, J., & Lancaster, T. (2004). Instrumental variable and propensity weighting for causal inference from longitudinal observational studies. Statistical Methods in Medical Research,13, 17–48.CrossRefGoogle Scholar
  44. Jackson, T., & Scott, R. (1989). On the nature of bankruptcy: An essay on bankruptcy sharing and the creditors’ bargain. Virginia Law Review,75(2), 155–204.CrossRefGoogle Scholar
  45. Jappelli, T., Pagano, M., & Bianco, M. (2005). Courts and banks: effects of judicial enforcement on credit markets. Journal of Money, Credit and Banking,23(2), 223–245.CrossRefGoogle Scholar
  46. Kim, M. (1996). When nonuse is useful: Bankruptcy law in post-communist central and Eastern Europe. Fordham Law Review,65(3), 1043–1073.Google Scholar
  47. Korobkin, D. (1991). Rehabilitating values: A jurisprudence of bankruptcy. Columbia Law Review,91(4), 717–789.CrossRefGoogle Scholar
  48. La Porta, R., Lopez-de-Silanes, F., Schleifer, H., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance,52, 1131–1150.CrossRefGoogle Scholar
  49. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The economic consequences of legal origins. Journal of Economic Literature,46(2), 285–332.CrossRefGoogle Scholar
  50. Lee, S., Peng, M., & Barney, J. (2007). Bankruptcy law and entrepreneurship development: A real options perspective. Academy of Management Review,32(1), 257–272.CrossRefGoogle Scholar
  51. Lee, S., Yamakawa, Y., Peng, M., & Barney, J. (2011). How do bankruptcy laws affect entrepreneurship development around the world? Journal of Business Venturing,26(5), 505–520.CrossRefGoogle Scholar
  52. Legros, P., & Mitchell, J. (1995). Bankruptcy as a control device in economies in transition. Journal of Comparative Economics,20, 265–301.CrossRefGoogle Scholar
  53. Manove, M., & Padilla, A. (2001). Collateral versus Project Screening: A Model of Lazy Banks. Rand Journal of Economics,32, 726–744.CrossRefGoogle Scholar
  54. Mitchell, J. (1990). Managerial discipline, productivity, and bankruptcy in capitalist and socialist economies. Comparative Economic Studies,32, 93–137.Google Scholar
  55. Moore, T. (2009). Soft budget constraints in EU transition economy enterprises. International Finance,12(3), 411–430.CrossRefGoogle Scholar
  56. Morrison, E. (2007). Bankruptcy decision making: An empirical study of continuation bias in small-business bankruptcies. Journal of Law and Economics,50(2), 381–419.CrossRefGoogle Scholar
  57. Morrison, E. (2008). Bankruptcy’s rarity: an essay on small business bankruptcy in the United States. European Company and Financial Law Review,5(2), 172–188.CrossRefGoogle Scholar
  58. Nistotskaya, M., & Cingolani, L. (2015). Bureaucratic structure, regulatory quality, and entrepreneurship in a comparative perspective: Cross-sectional and panel data evidence. Journal of Public Administration Research and Theory,26(3), 519–534.CrossRefGoogle Scholar
  59. OSEO. (2008). Une analyse comparative des procédures de faillite: France, Allemagne, Royaume-Uni, La Documentation Française (“Regards sur les PME”), n°16.Google Scholar
  60. Pistor, K., Raiser, M., & Gelfer, S. (2000). Law and finance in transition economies. Economics of Transition,8(2), 325–368.CrossRefGoogle Scholar
  61. Radulović, B. (2008). The effect of 363 sales on recovery rates: allowing for self-selection bias. SSRN Working Paper,1, 1. Scholar
  62. Rosenbaum, P., & Rubin, D. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika,70, 41–55.CrossRefGoogle Scholar
  63. Sajter, D. (2010). Challenges for a mature insolvency system in a transitional economy: Lessons from Croatia. International Insolvency Review,19, 133–144.CrossRefGoogle Scholar
  64. Sak, P. B., & Schiffman, H. N. (1994). Bankruptcy law reform in Eastern Europe. The International Lawyer,28, 927–950.Google Scholar
  65. Staszkiewicz, P., & Morawska, S. (2019). The efficiency of bankruptcy law: evidence of creditor protection in Poland. European Journal of Law and Economics. Scholar
  66. Stef, N. (2017). Voting rules in bankruptcy law. Review of Law & Economics,13(1), 39.CrossRefGoogle Scholar
  67. Stiglitz, J. (1974). On the irrelevance of corporate financial policy. American Economic Review,64(6), 851–866.Google Scholar
  68. Sundgren, S. (1998). Does a reorganization law improve the efficiency of the insolvency law? The Finnish experience, European Journal of Law and Economics,6, 177–198.CrossRefGoogle Scholar
  69. Thorburn, K. (2000). Bankruptcy auctions: costs, debt recovery and firm survival. Journal of Financial Economics,58, 337–368.CrossRefGoogle Scholar
  70. White, M. (1989). The corporate bankruptcy decision. Journal of Economic Perspectives,3(2), 129–151.CrossRefGoogle Scholar
  71. World Bank. (2008). Comparing regulation in 178 economies. Doing Business Report 2008, Washington.Google Scholar
  72. World Bank. (2013). Smarter regulations for small and medium-size enterprises. Doing Business Report 2013, Washington.Google Scholar
  73. World Bank. (2018). Reforming to create jobs. Doing Business Report 2018, Washington.Google Scholar
  74. Wruck, K. (1990). Financial distress, reorganization and organizational efficiency. Journal of Financial Economics,27, 419–444.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.LARGE, EM Strasbourg Business School, IEP StrasbourgUniversity of StrasbourgStrasbourgFrance
  2. 2.CEREN EA, 7477, Burgundy School of BusinessUniversité Bourgogne Franche-ComtéDijonFrance

Personalised recommendations