Financial Distress, Bankruptcy Law and the Business Cycle

Suarez, Javier and Sussman, Oren (2007) Financial Distress, Bankruptcy Law and the Business Cycle. Annals of Finance, 3 (1). pp. 5-35.


This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ‘softens’ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust or actively managing the interest rate across the cycle could stabilize the economy in the long run. A comprehensive welfare analysis of these policies is provided as well.

Item Type: Article
Keywords: Bankruptcy law; Business cycles; Financial distress; Liquidation; finance
Subject(s): Finance
Date Deposited: 18 Feb 2012 20:53
Last Modified: 02 Mar 2017 14:39
Funders: N/A

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