Did specialised courts affect the frequency of business bankruptcy petitions in Spain?

Abstract

Spanish small businesses rarely file for bankruptcy, and Spanish bankruptcy rates are abnormally small. The historical inadequacy of the Spanish insolvency system has led most enterprises to rely on the de facto alternative mortgage system and to overinvest in fixed tangible assets: a distortion that may trigger significant adverse effects, for instance on the enabling environment of novel entrepreneurship. The reform of the bankruptcy law that took place in Spain some 10 years in order to modernise the insolvency system involved, as a main novelty, the establishment of specialised commercial courts (Juzgados de lo Mercantil). Since the net benefits of specialised judicial functions are in principle ambiguous, we study empirically whether these new bodies had any impact, over and above the economic crisis, on the use of the bankruptcy system. Exploiting the staggered timing of the new courts geography, we estimate an endogenous treatment model with a binary policy variable which allows to measure the effect of the reform on bankruptcy rates. The results support the view that the new bankruptcy law took the right path, but the size of the estimated parameters call for further policy efforts in that direction.

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

Fig. 1

This Figure has been downloaded from http://www.poderjudicial.es/ (01/09/2016)

Fig. 2

Notes

  1. 1.

    For a measure of how the rule of law is experienced in practice in different countries see the World Justice Project (WJP) Rule of Law Index 2015. On the global index, Spain ranks 24th out of 102 countries.

  2. 2.

    Euler Hermes (http://www.eulerhermes.com) is a leading provider of trade-related insurance solutions that publishes regularly an Economic Outlook with worldwide insolvency indicators and country risk assessments. Data on insolvencies come from national statistics and are then homogenised for cross-country comparison. In Table 1a and b below we calculated two different indicators: the business bankruptcy ratio (with the population of active enterprises in the denumerator) and the conditional business bankruptcy ratio (with the number of enterprises that exited the market in the denumerator). On both measures the ranking of Spain remains basically the same. Data on enterprises are taken from OECD Structural and Demographic Business Statistics (http://www.oecd.org).

  3. 3.

    It goes without saying that the liquidation of secured credits may occur under both regimes. If firms and creditors prefer the mortgage system to filing for bankruptcy, it must be the case that net benefits are bigger under the former than under the latter. Indeed, on some important dimensions, the mortgage system looks very efficient, guaranteeing creditors higher discounted recovery rates and firms (indirectly) better access to credit. According to a survey by the European Mortgage Federation (2007) the time lapse between mortgage foreclosures and the actual distribution of the proceeds of the sale was 7–9 months in Spain, 12 months in Germany, 15–25 months in France and 5–7 years in Italy. At the same time, the median length of a bankruptcy process was between 20 and 23 months. Presumably even higher - if anything - after the 2008 crisis (see also Celentani et al., 2012, p. 27).

  4. 4.

    Here inefficient liquidation refers to the liquidation of the firm's assets by the creditor even if the project's continuation value is higher than its liquidation value.

  5. 5.

    Under the Spanish Constitution, unlike an ordinary law, an organic law is required on specific areas of law (e.g. fundamental rights) and must be passed by an absolute majority of the Congress of Deputies. In the present case modifications to both the fundamental rights of the debtors and the judicial organisation prompted this rank of the law.

  6. 6.

    It is interesting to see how these pitfalls are described in the official motivations (expósition de motivos) of the Ley 22/2003: “Archaism, lack of adaptation to the social and economic reality of our time, dispersion, lack of a harmonic system, prevalence of certain private interests over other more general ones disregarding the principle of equality in treatment of creditors, thus leading to unfair solutions, frequently caused in practice by manoeuvres in bad faith or with abuse or simulation, which the rules that regulate the insolvency institutions do not manage to effectively suppress” (Ministerio de Justicia, 2010, pp. 2).

  7. 7.

    As told by judge Blas Alberto González Navarro (2008, p. 8), recruiting talented judges turned out to be difficult: "The first edition of the examination was sat by the most well-known Judges, those who had been hearing mercantile cases for years, especially in Madrid and Barcelona, and a second group of Magistrates who were simply interested in the subject… [N]early 150 candidates applied for 50 positions, but only 37 passed the exam. Famous names who at the time were considered the elite of mercantile justice failed." Needless to say, even talented specialized judges might make imperfect decisions, depending on professional experience, isolation, and the lack of percolation of ideas typical of courts with exclusive jurisdiction.

  8. 8.

    This Figure has been downloaded from http://www.poderjudicial.es/ (01/09/2016).

  9. 9.

    Las Palmas de Gran Canaria, Santa Cruz de Tenerife, Ceuta and Melilla have been excluded, since the data for these territories are incomplete.

  10. 10.

    Regional dummies are expected to capture differences in judicial efficiency accross Spain provinces (Mora-Sanguinetti et al, 2017).

References

  1. Acs, Z., Åstebro, T., Audretsch, D., & Robinson, D. T. (2016). Public policy to promote entrepreneurship: A call to arms. Small Business Economics, 47(1), 35–51.

    Article  Google Scholar 

  2. Audretsch, D. B., & Keilbach, M. (2007). The theory of knowledge spillover entrepreneurship. Journal of Management Studies, 44(7), 1242–1254.

    Article  Google Scholar 

  3. Ayotte, K., & Yun, H. (2007). Matching bankruptcy laws to legal environments. The Journal of Law, Economics, & Organization, 25(1), 2–30.

    Article  Google Scholar 

  4. Bolton, P., & Scharfstein, D. (1996). Optimal debt structure and the number of creditors. Journal of Political Economy, 104(1), 1–25.

    Article  Google Scholar 

  5. Buehler, S., Kaiser, C., & Jaeger, F. (2012). The geographic determinants of bankruptcy: Evidence from Switzerland. Small Business Economics, 39(1), 231–251.

    Article  Google Scholar 

  6. Cabrillo, F., & Fitzpatrick, S. (2008). The economics of courts and litigation. Cheltenham: Edward Elgar.

    Google Scholar 

  7. Cameron, A. C., & Trivedi, P. K. (2005). Microeconometrics: Methods and applications. New York: Cambridge University Press.

    Google Scholar 

  8. Celentani, M., Garcia-Posada, M. & Gomez, F. (2012). The Spanish business bankruptcy puzzle. Mimeo. https://mafiadoc.com/the-spanish-business-bankruptcy-puzzle_59cec65f1723dd81fff0dd63.html. Accessed 14 October 2017.

  9. Celentani, M., García-Posada, M. & Gómez, F. (2010). The Spanish business bankruptcy puzzle and the crisis. FEDEA Working Paper 2010-11, http://documentos.fedea.net/pubs/dt/2010/dt-2010-11.pdf. Accessed 13 October 2017.

  10. Chemin, M. (2012). Does court speed shape economic activity? Evidence from a court reform in India. Journal of Law Economics and Organization, 28(3), 460–485.

    Article  Google Scholar 

  11. Claessens, S., Diankov, S., & Klapper, L. F. (2003). Journal of Empirical Finance, 10(2), 199–216.

    Article  Google Scholar 

  12. Claessens, S., & Klapper, L. F. (2005). Bankruptcy around the World: Explanations of its relative use. American Law and Economics Review, 7(1), 253–283.

    Article  Google Scholar 

  13. Consejo General del Poder Judicial (2015). Memoria Sobre el Estado, Funcionamiento y Actividades del Consejo General del Poder Judicial y de los Juzgados y Tribunales en el Año 2014. Getafe, Secretaria General del Consejo General del Poder Judicial.

  14. Dreyfuss, R. (1990). Specialized adjudication. Brigham Young University Law Review, 1990(1), 377–441.

    Google Scholar 

  15. Euler Hermes (2014). Eiciency of Mortgage Collateral in the European Union. Economic Outlook no. 1207. Brussels: European Mortgage Federation.

  16. Garcia-Posada, M. (2013). Insolvency institutions and efficiency: The Spanish Case. SSRN. https://doi.org/10.2139/ssrn.2213809.

    Google Scholar 

  17. Garcia-Posada, M., & Mora-Sanguinetti, J. S. (2012). Why do Spanish firms rarely use the bankruptcy system?. The role of the mortgage institution: SSRN. https://doi.org/10.2139/ssrn.2151810.

    Google Scholar 

  18. Garcia-Posada, M., & Mora-Sanguinetti, J. S. (2014). Are there alternatives to bankruptcy? A study of small business distress in Spain. SERIEs Journal of the Spanish Economic Association, 5(2–3), 287–332.

    Google Scholar 

  19. Garoupa, N., Jorgensen, N., & Vazquez, P. (2010). Assessing the argument for specialized courts: Evidence from Family Courts in Spain. International Journal of Law Policy & Family, 24(1), 54–66.

    Article  Google Scholar 

  20. González Navarro, B. A. (2008). Commercial courts. Would they make it easier for the right holders?: The Spanish case. Stockholm, Global Anti-Counterfeiting Network.

  21. Heckman, J. (1976). The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models. Annals of Economic and Social Measurement, 5(4), 475–492.

    Google Scholar 

  22. Heckman, J. (1978). Dummy endogenous variables in a simultaneous equation system. Econometrica, 46(4), 931–959.

    Article  Google Scholar 

  23. Instituto Nacional de Estadistica. (2015). España en cifras 2015. Retrieved September 4, 2018 from https://www.ine.es/prodyser/espa_cifras/2015/index.html.

  24. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. The Journal of Political Economy, 106(6), 1113–1155.

    Article  Google Scholar 

  25. Lefgren, L., & McIntyre, F. (2009). Explaining the puzzle of cross‐state differences in bankruptcy rates. Journal of Law & Economics, 52(2), 367–393.

    Article  Google Scholar 

  26. Maddala, G. S. (1983). Limited-dependent and qualitative variables in econometrics. Cambridge: Cambridge University Press.

    Google Scholar 

  27. Ministerio de Justicia. (2010). Act on insolvency. Secretaria General Técnica: Bilbao.

    Google Scholar 

  28. Mora-Sanguinetti, J. S., Martinez-Matute, M., & Garcia-Posada, M. (2017). Credit, crisis and contract enforcement: Evidence from the Spanish loan market. European Journal of Law and Economics, 44(2), 361–383.

    Article  Google Scholar 

  29. Morrison, E. R. (2008) Who Needs Bankruptcy Law? Sesquicentennial Essays of the Faculty of Columbia Law School, pp. 173–178.

  30. Ponticelli, J. (2015). Court enforcement and firm productivity: Evidence from a bankruptcy reform in Brasil. SSRN. https://doi.org/10.2139/ssrn.2405092.

    Google Scholar 

  31. Succurro, M. (2012). Bankruptcy systems and economic performance across countries: Some empirical evidence. European Journal of Law and Economics, 33(1), 101–126.

    Article  Google Scholar 

  32. Visaria, S. (2009). Legal reform and loan repayment: The microeconomic impact of debt recovery tribunals in India. American Economic Journal: Applied Economics, 1(3), 59–81.

    Google Scholar 

  33. Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed.). Cambridge. MA: MIT Press.

    Google Scholar 

  34. Zimmer, M. (2009). Overview of specialized courts. International Journal of Court Administration, 2(1), 46–60.

    Article  Google Scholar 

Download references

Acknowledgements

C. Detotto acknowledges the financial support by the “Visiting Professor Programme” of the University of Sassari (Resolution No. 53/69 of 20/12/2013). The authors would like to thank an anonymous referee for helpful and valuable comments and suggestions.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Claudio Detotto.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Detotto, C., Serra, L. & Vannini, M. Did specialised courts affect the frequency of business bankruptcy petitions in Spain?. Eur J Law Econ 47, 125–145 (2019). https://doi.org/10.1007/s10657-018-9601-z

Download citation

Keywords

  • Bankruptcy
  • Commercial courts
  • Endogenous treatment effects
  • Spain

JEL Classification

  • C31
  • C33
  • G33
  • K2