Società Italiana di Diritto ed Economia, SIDE - ISLE 2015 - 11TH ANNUAL CONFERENCE

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Bankruptcy Delay and Firms’ Dynamics
Giovanni Ramello

Last modified: 2015-12-15


Institutions Matter! A vast literature has explored the impact of the institutional
framework on economic activity. Regulatory regimes shape the environment in which
entrepreneurs might conduct their transactions and thus might substantially affect the
propensity to enter markets. This is particularly true for bankruptcy law, since it regulates
a very crucial moment in firms' life: however, from this painful event, might still yield
beneficial returns on the societal level. Previous works have shown how
entrepreneurship-friendly bankruptcy regimes might have a positive impact on markets'
dynamics by encouraging firms to engage risks and entry markets. At the same time such
regulation, by fostering more competition, pushes unproductive firms out of the markets
more smoothly, thus allowing a more efficient allocation of their assets. However, even
the most well designed regulation, without a proper enforcement, might turn out to be
ineffective. Accordingly, by sharing from previous works dealing with judicial
performance, we focus on the issue of how judges enforce bankruptcy regulation, using
Italy as a case study. The idea to be tested is the following: a “faster” court-system will
help make the bankruptcy regulation more “entrepreneurship-friendly” and thus make the
markets more dynamic (higher firms’ entry and exit rates). In particular, we hypothesize
that the entry of prospective entrepreneurs will be hindered by the increasing “indirect”
costs related to bankruptcy procedures’ length. On the individual level, as the time
needed to undergo bankruptcy increases, the moment of a “fresh start” will be postponed
and, equally, all the negative consequences that relate to failed entrepreneurs will persist.
On the societal level, lengthy procedures will determine the delay of a more efficient
allocation of resources. However, if bankruptcy indirect costs are positively linked with
judicial delay, one might equally hypothesize that, when such costs are too high, firms
might be reluctant to bear them and prefer to operate at financial loss: thus, bankruptcy
delay should have a negative impact also on firms’ exit rate.
This issue is particularly binding in the case of Italy: when considering European
developed economies, Italy is by far the worst performing country when it comes to
judicial delay and markets’ dynamism. In order to test the aforementioned hypotheses we
are going to exploit the fact that both bankruptcy substantial regulation and procedures
are the same across Italy. Accordingly, any difference in the bankruptcy system that firms
are going to deal with will ultimately depend on how effectively courts will enforce this
regulation. In order to disentangle this mechanism we employ a unique dataset
accounting for bankruptcy delays in the 165 Italian Tribunal Districts between 2005 and
2011. This dataset has been merged with firms’ dynamics figures and other control
variables accounting for markets’ characteristics. From the empirical analysis conducted,
we found evidence of the impact exerted by a firm-friendly bankruptcy system might
differently affect firms' entry and exit rates across Italy. Interesting results emerge from
our empirical analysis, suggesting that bankruptcy delay might have a different role in
incentivizing risk between limited liability companies and entrepreneurs personally liable.

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