Financial Consequences of the Bankruptcy Law: European Comparison
Carlos López Gutierrez
Myriam García Olalla
Begoña Torre Olmo
The reaction of equity returns before bankruptcy filings has been developed widely in financial literature. Traditionally, event study methodology has been used in this kind of studies despite its limitations. Therefore, we propose a different approach contrasting if the reaction of equity returns is correlated with the different bankruptcy codes among countries. We develop an analysis with a sample that includes companies with insolvency problems in Germany, Spain, France and the United Kingdom from 1990 to 2002. The results allow us to conclude that the type of bankruptcy law affects the valuation of equity. In addition, we show how the companies under creditor-oriented procedures (United Kingdom and Germany before the 1994 reform) have greater negative returns, due to the wealth transference that takes place from the shareholders towards the bondholders.
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