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American Law and Economics Review 2005 7(1):253-283; doi:10.1093/aler/ahi004
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© The Author 2005. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org

Bankruptcy around the World: Explanations of Its Relative Use

Stijn Claessens and Leora F. Klapper

The World Bank

Send correspondence to: Stijn Claessens, Financial Sector Operations and Policy Department, The World Bank, 1818 H Street, Washington, DC 20433; E-mail: sclaessens{at}worldbank.org.

The law and finance literature highlights the role of investor rights in financial development, firm corporate governance, and financing patterns. For a panel of 35 countries, we investigate how bankruptcy use relates to countries’ creditor rights and judicial efficiency. Bankruptcies are higher in countries with more creditor rights, except for a "no automatic stay on assets" provision. Higher judicial efficiency is associated with more bankruptcies and appears as a substitute with more creditor rights. Although only a first step, our findings suggest creditor rights are complex, balancing prioritization of claims, ex ante risk-taking incentives, and an efficient resolution of distressed firms.


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