Skip to main content
SpringerLink
Log in

Assessing viability of Finnish reorganization and bankruptcy firms

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

Abstract

The objective of the Finnish Bankruptcy Act (FBA) is to give the assets of a non-viable firm to the bankrupted estate and divide them by the creditors of the firm (liquidation). However, the objective of the Finnish Company Reorganization Act (FCRA) is to recover a temporally financially distressed firm that is viable. In these acts, the viability concept is used to refer to a firm that is able to pay its financial obligations in the future. FBA is not efficient if a viable firm is filed for bankruptcy and liquidated. In the same way, FCRA is not efficient if a non-viable firm is filed for reorganization. The purpose of this study is to assess viability of Finnish firms filed for reorganization and bankruptcy. Logistic regression analysis is used to extract two measures for viability. The first measure is based on financial statement information only while the second one takes account of both financial and non-financial information. The estimation sample comprises data from 43636 viable and 98 non-viable firms. The resulted measures are used to assess viability of a sample of firms filed for reorganization and bankruptcy in 2004. In general, the results show that the greater part of firms filed for reorganization is non-viable whereas many of bankruptcy firms are viable. This reflects an occurrence of filtering failure.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

References

  • Altman, E. I. (1968). Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. The Journal of Finance., 23(4), 589–609.

    Article  Google Scholar 

  • Altman, E. I. (1993). Corporate financial distress and bankruptcy: a complete guide to predicting and avoiding distress and profiting from bankruptcy. 2nd ed. New York, NY: John Wiley.

    Google Scholar 

  • Altman, E., Haldeman, R. G., & Narayanan, P. (1977). Zeta-analysis. A new model to identify bankruptcy risk of corporations. Journal of Banking & Finance, 1(1), 29–54.

    Article  Google Scholar 

  • Back, P. (2005). Explaining financial difficulties based on previous payment behavior, management background variables and financial ratios. European Accounting Review, 14(4), 839–868.

    Article  Google Scholar 

  • Balcaen, S., & Ooghe, H. (2006). 35 years of studies on business failure: An overview of the classic statistical methodologies and their related problems. The British Accounting Review, 38, 63–93.

    Article  Google Scholar 

  • Barniv, R., Agarwal, A., & Leach, R. (2002). Predicting bankruptcy resolution. Journal of Business Finance & Accounting, 29(3&4), 497–520.

    Article  Google Scholar 

  • Beaver, W. H. (1966). Financial ratios as predictors of failure. Empirical Research in Accounting: Selected Studies, 4, 71–111.

    Google Scholar 

  • Bergström, C., Eisenberg, T., & Sundgren, S. (2004). On the design of efficient priority rules for secured creditors: Empirical evidence from a change in law. European Journal of Law and Economics, 18, 273–294.

    Google Scholar 

  • Bergström, C. & Sundgren, S. (1998). Förmansrättens teori och empiri. Swedish school of economics and business administration. Working Paper.

  • Blazy, R., Chopard, B., & Fimayer, A. (2008). Bankruptcy law: A mechanism of governance for financially distressed firms. European Journal of Law and Economics, 25, 253–267.

    Article  Google Scholar 

  • Bulow, J., & Shoven, J. (1978). The bankruptcy decision. Bell Journal of Economics, 9(2), 437–456.

    Article  Google Scholar 

  • Campbell, S. V. (1996). Predicting bankruptcy reorganization for closely held firms. Accounting Horizons, 10, 12–25.

    Google Scholar 

  • Casey, C. J., McGee, V. E., & Stickney, C. P. (1986). Discriminanting between reorganized and liquidated firms in bankruptcy. The Accounting Review, 61, 249–262.

    Google Scholar 

  • Comerford, R. A. (1976). Bankruptcy as a business strategy: a multivariate analysis of the financial characteristics of firms which have succeeded in Chapter XI compared to those which have failed. Unpublished Doctoral Dissertation, University of Massachusetts, USA.

  • Couwenberg, O. (2001). Survival rates in bankruptcy systems: Overlooking the evidence. European Journal of Law and Economics, 12(3), 253–273.

    Article  Google Scholar 

  • Davydenko, S., & Franks, J. R. (2008). Do bankruptcy codes matter? A study of defaults in France, Germany, and the UK. The Journal of Finance, 63(2), 565–608.

    Article  Google Scholar 

  • Eger, T. (2001). Bankruptcy regulations and the new German insolvency law from an economic point of view. European Journal of Law and Economics, 11(1), 29–46.

    Article  Google Scholar 

  • El Hennawy, R. H. A., & Morris, R. C. (1983). The significance of base year in developing failure prediction models. Journal of Business Finance & Accounting, 10(2), 209–223.

    Article  Google Scholar 

  • Fisher, T. C. (2007). Discussion of Wong et al. Abacus, 43(3), 388–395.

    Article  Google Scholar 

  • Fisher, T. C., & Martel, J. (1995). The creditors’ financial reorganization decision: New evidence from Canadian data. Journal of Law, Economics and Organization, 11, 112–126.

    Google Scholar 

  • Fisher, T. C., & Martel, J. (2004). Empirical estimates of filtering failure in court-supervised reorganization. Journal of Empirical Legal Studies, 1(1), 143–164.

    Article  Google Scholar 

  • Franks, J. R., Nyborg, K. G., & Torous, W. N. (1996). A comparison of US, UK and German insolvency codes. Financial Management, 25, 86–101.

    Article  Google Scholar 

  • Franks, J. R., & Torous, W. N. (1989). An empirical investigation of US firms in reorganization. The Journal of Finance, 44, 747–769.

    Article  Google Scholar 

  • Frost-Drury, A., Greinke, A., & Shailer, G. (1998). Distinguishing distressed companies choosing voluntary administration. Paper presented at AAANZ annual conference, Adelaine.

  • Gine, X. & Love, I. (2006). Do reorganization costs matter for efficiency? Evidence from a bankruptcy reform in Colombia. World Bank Policy Research Working Paper 3970, July 2006.

  • Hong, S. C. (1983). A bankruptcy outcome: model and empirical test. Working Paper, University of California at Berkeley, USA.

  • Hosmer, D., & Lemeshow, S. (1989). Applied logistic regression. New York, USA: John Wiley & Sons.

    Google Scholar 

  • Hotchkiss, E. S. (1995). Postbankruptcy performance and management turnover. The Journal of Finance, 50, 3–21.

    Article  Google Scholar 

  • Jensen-Conklin, S. (1992). Do confirmed Chapter 11 Plans consummate? The results of a study and analysis of the law. Commercial Law Journal, 97, 297–331.

    Google Scholar 

  • Jones, F. (1987). Current techniques in bankruptcy predicting. Journal of Accounting Literature, 6, 131–164.

    Google Scholar 

  • Kaiser, K. M. (1996). European bankruptcy laws: Implications for corporations facing financial distress. Financial Management, 25, 67–85.

    Article  Google Scholar 

  • Karels, G., & Prakash, A. J. (1987). Multivariate normality and forecasting of business bankruptcy. Journal of Business Finance & Accounting, 14(4), 573–593.

    Article  Google Scholar 

  • Keasey, K., & Watson, R. (1987). Non-financial symptoms and the prediction of small company failure: A test of Argenti’s hypotheses. Journal of Business Finance & Accounting, 14(3), 335–354.

    Article  Google Scholar 

  • Kennedy, D. B., & Shaw, W. H. (1991). Evaluating financial distress resolution using prior audit opinions. Contemporary Accounting Research, 8(l), 97–214.

    Article  Google Scholar 

  • Koskelo, P. (2003). Commercial enforcement and insolvency systems. Country: Finland. The World Bank Global Judges Forum. 12–23 May 2003. Pepperdine University School of Law, Malibu, California.

  • Laitinen, E. K. (1991). Financial ratios and different failure processes. Journal of Business Finance and Accounting, 18(3), 649–674.

    Google Scholar 

  • Laitinen, E. K. (1999). Predicting a corporate credit analyst’s risk estimate by logistic and linear models. International Review of Financial Analysis, 8(2), 97–121.

    Article  Google Scholar 

  • Laitinen, E. K. (2008). Data system for assessing probability of failure in SME reorganization. Industrial Management & Data Systems, 108(7), 849–866.

    Article  Google Scholar 

  • Laitinen, E. K. (2009). Success factors in small firm reorganization. International Journal of Management and Enterprise Development, 6(3), 300–321.

    Article  Google Scholar 

  • Laitinen, T., & Kankaanpää, M. (1999). Comparative analysis of failure prediction methods: The Finnish case. The European Accounting Review, 8(1), 67–92.

    Article  Google Scholar 

  • Lensberg, T., Eilifsen, A., & McKee, T. E. (2006). Bankruptcy theory development and classification via genetic programming. European Journal of Operational Research, 169(2), 677–697.

    Article  Google Scholar 

  • LoPucki, L. M. (1983a). The debtor in full control—systems failure under Chapter 11 of the bankruptcy code I. American Bankruptcy Law Journal, 57, 99–126.

    Google Scholar 

  • LoPucki, L. M. (1983b). The debtor in full control—systems failure under Chapter 11 of the bankruptcy code II. American Bankruptcy Law Journal, 57, 247–273.

    Google Scholar 

  • LoPucki, L. M. (2004). A team production theory of bankruptcy reorganization. Vanderbilt Law Review, 57(3), 740–779.

    Google Scholar 

  • LoPucki, L. M., & Doherty, J. W. (2002). Why are Delaware and New York bankruptcy reorganizations failing? Vanderbilt Law Review, 55(6), 1933–1985.

    Google Scholar 

  • Mooradian, R. M. (1994). The effect of bankruptcy protection on investment: Chapter 11 as a screening device. The Journal of Finance, 49(4), 1403–1430.

    Article  Google Scholar 

  • Philippe & Partners and Deloitte & Touche, Corporate Finance (2002). Bankruptcy and a fresh start: stigma on failure and legal consequences of bankruptcy. Brussels, Belgium: International Insolvency Institute.

  • Poston, K. M., Harmon, W. K., & Gramlich, J. D. (1994). A test of financial ratios as predictors of turnaround versus failure among financially distressed firms. Journal of Applied Business Research, 10, 41–56.

    Google Scholar 

  • Ravid, S. A., & Sundgren, S. (1998). The comparative efficiency of small-firm bankruptcies: a study of the US and Finnish bankruptcy codes. Financial Management, 27(4), 28–40.

    Article  Google Scholar 

  • Routledge, J., & Gadenne, D. (2000). Financial distress, reorganization and corporate performance. Accounting & Finance, 40, 233–260.

    Article  Google Scholar 

  • Routledge, J., & Gadenne, D. (2004). An exporatory study of the company reorganisation decision in voluntary administration. Pasific Accounting Review, 16, 31–56.

    Article  Google Scholar 

  • Santomero, A., & Vinso, J. (1977). Estimating the probability of failure for firms in the banking system. Journal of Banking & Finance, 1, 185–205.

    Article  Google Scholar 

  • Schwehr, B. (2003). Corporate rehabilitation proceedings in the United States and Germany. International Insolvency Review, 12(1), 11–35.

    Article  Google Scholar 

  • Scott, J. (1981). The probability of bankruptcy. Journal of Banking & Finance, 5, 317–344.

    Article  Google Scholar 

  • Shumway, T. (2001). Forecasting bankruptcy more accurately: a simple hazard model. The Journal of Business, 74(1), 101–124.

    Article  Google Scholar 

  • Sobehart, J. R., Keenan, S., & Stein, R. (2000). Rating methodology—benchmarking quantitative default risk models: A validation methodology. Technical Report. Moody’s Investors Service.

  • Spear, D. (1989). The new French bankruptcy statute. Commercial Law Journal, 94(1), 69–80.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Takagi, S. (2003). Restructuring in Japan. International Insolvency Review, 12(1), 1–10.

    Article  Google Scholar 

  • Thorburn, K. S. (2000). Bankruptcy auctions: costs, debt recovery, and firm survival. Journal of Financial Economics, 58(3), 337–368.

    Article  Google Scholar 

  • White, M. (1980). Public policy toward bankruptcy: me-first and other priority rules. Bell Journal of Economics, 11, 550–564.

    Article  Google Scholar 

  • White, M. (1984). Bankruptcy, liquidation and reorganization. In D. Logue (Ed.), Handbook of modern finance. New York: Warren, Gorham and Lamont.

    Google Scholar 

  • White, M. (1989). The corporate bankruptcy decision. Journal of Economic Perspectives, 3, 129–152.

    Google Scholar 

  • White, M. (1994). Corporate bankruptcy as a filtering device: Chapter 11 reorganizations and out-of-court debt restructurings. Journal of Law, Economics and Organization, 10(2), 268–295.

    Google Scholar 

  • Wilcox, J. (1971). A simple theory of financial ratios as predictors of failure. Journal of Accounting Research, 9(2), 389–395.

    Article  Google Scholar 

  • Wilcox, J. (1973). A prediction of business failure using accounting data. Empirical Research in Accounting: Selected Studies, 11(3), 163–190.

    Google Scholar 

  • Wilcox, J. (1976). The gambler’s ruin approach to business risk. Sloan Management Review Fall, 18(1), 33–46.

    Google Scholar 

Download references

Acknowledgments

This study is financially supported by the Academy of Finland (Research grant Nr. 118926) and this is gratefully acknowledged.

Author information

Authors and Affiliations

  1. Department of Accounting and Finance, University of Vaasa, POB 700, 65101, Vaasa, Finland

    Erkki K. Laitinen

Authors
  1. Erkki K. Laitinen
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Erkki K. Laitinen.

Appendix

Appendix

See Table 8.

Table 8 Descriptive statistics of the sample
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Laitinen, E.K. Assessing viability of Finnish reorganization and bankruptcy firms. Eur J Law Econ 31, 167–198 (2011). https://doi.org/10.1007/s10657-009-9136-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-009-9136-4

Keywords

JEL Classifications

Search

Navigation