Business failure: reorganization instead of liquidation and informational efficiency of selection process in canadian bankruptcy law?
Business reorganizations have become a common phenomenon. Under reorganization, creditors’ rights are restricted and management stays in place. Unsecured debt is the main source of outside financing for many SMEs. With a reorganization, the amount of unsecured debt is revised down by as much as 90% or even more. The Bankruptcy and Insolvency Law is one of the two main laws in Canada regarding business reorganizations. It put in place a selection process of businesses to be re-organized. The paper reports an evaluation of this process, which is under the responsibility of trustees. While research on the subject has focused on process outcome in terms of survival rates of selected firms, this research evaluates the informational efficiency of the process. Inspired from financial theory, the research makes a detailed analysis of the use of the reorganization procedure by 3 916 businesses and relates this analysis to the financial data available at selection time.