An experimental study of the investment implications of bankruptcy laws

Date

2019-02-01

Author

Büyükboyacı Hanay, Mürüvvet İlknur
Kibris, Arzu
KIBRIS, ÖZGÜR

Metadata

Show full item record

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Item Usage Stats

108
views

0
downloads

In bankruptcy laws, proportionality is the universal norm when allocating the liquidation value of a bankrupt firm among creditors. The theoretical literature on bankruptcy proposes two prominent alternatives to proportionality: the equal awards and the equal losses principles. We use an experiment to analyze and compare actual creditor behavior under these three principles. More specifically, we test the following hypotheses: replacing proportionality with equal losses increases total investment while replacing proportionality with equal awards decreases total investment; under all three principles individual investment choices decrease in response to an increase in the probability of bankruptcy or an increase in risk aversion; total investment difference between proportionality and either of the other two principles is independent of the probability of bankruptcy as long as both induce an interior equilibrium. The results of the nonparametric tests and random effects Tobit regression analyses we conduct on our experimental data offer support for all hypotheses.

Subject Keywords

Bankruptcy, Investment game, Experiment, Proportional, Equal losses, Equal awards, Investment

URI

https://hdl.handle.net/11511/35456

Journal

JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION

DOI

https://doi.org/10.1016/j.jebo.2019.01.001

Collections

Department of Economics, Article

Suggestions

OpenMETU
Core

Loss sharing in partnerships Büyükboyacı Hanay, Mürüvvet İlknur (Orta Doğu Teknik Üniversitesi (Ankara, Turkey), 2017-4) I use an experiment to analyze individuals’ choices for two well-known allocation rules proposed by the theoretical literature while sharing losses (bankruptcy situation): Equal Losses Rule (EL) and Proportional Rule (PRO). For the experiment, I use an investment game where individuals choose how much to contribute to a group project. The contribution of two individuals determines the value of the project. While this value rises with some probability (success rate), it shrinks (bankruptcy) with the rem...
An analysis of contagious volatility in international stock exchanges Gözpınar, Serdar Kamil; Oran, Adil; Department of Business Administration (2004) In late 1994 when the Mexican financial crisis occurred, many emerging economies experienced negative returns. For instance, Latin American markets, Hong Kong, Singapore, Korea and Thailand all showed stock price declines of 15% to 30%. Similarly, the Asian Crisis of 1997, the Russian Crisis of 1998, and the Brazilian Crisis of 1999 have all brought about significant negative returns in many seemingly unrelated emerging markets. Based on these figures, it was found worthwhile to study the spread of financia...
Modeling correlation structure for collateralized debt obligations and determining the underlying credit default swap spread equations İlalan, Deniz; Hayfavi, Azize; Omay, Tolga; Department of Financial Mathematics (2015) Pricing complex financial derivatives such as collateralized debt obligations (CDOs) is considered as the main reason triggering the 2008 financial crisis. The correlation structure related to the credit risks involved in a portfolio for pricing issues have been tried to overcome via a Gaussian copula framework first introduced by David Li. This approach regards the correlation among the credit risks as normally distributed, enabling us to derive analytical solutions. However, despite its simplicity, this G...
An empirical study on early warning systems for banking sector Boyraz, Mustafa Fatih; Gaygısız Lajunen, Esma; Department of Economics (2012) Early Warning Systems (EWSs) for banking sectors are used to measure occurrence risks of banking crises, generally observed with a rundown of bank deposits and widespread failures of financial institutions. In countries with a small number of banks, for example Turkey with 48 banks (BDDK, 2011), every bank may be considered to have a systematic importance since the failure of any individual bank may carry a potential threat to lead to a banking crisis. Taking into account this fact the present study focuses...
Utilization of outlier-adjusted lee-carter model in mortality estimation on whole life annuities Yavrum, Cem; Selçuk Kestel, A. Sevtap.; Department of Actuarial Sciences (2019) Annuity and its pricing are very critical to the insurance companies for their financial liabilities. Companies aim to adjust the prices of annuity by choosing the forecasting model that fits best to their historical data. While doing it, there may be outliers in the historical data influencing the model. These outliers can be arisen from environmental conditions and extraordinary events such as weak health system, outbreak of war, occurrence of a contagious disease. These conditions and events impact morta...

Citation Formats

M. İ. Büyükboyacı Hanay, A. Kibris, and Ö. KIBRIS, “An experimental study of the investment implications of bankruptcy laws,” JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION, pp. 607–629, 2019, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/35456.