Bankruptcy Auctions: Costs, Debt Recovery, and Firm Survival

By Karin S. Thorburn of Dartmouth College

December 2000

Abstract: This paper provides some first, large-sample evidence on the Swedish auction bankruptcy system. Compared to U.S. Chapter 11 cases, the small-firm bankruptcy auctions examined here are substantially quicker, have lower costs, and avoid deviations from absolute priority. Three-quarters of the firms are auctioned as going concerns, which is similar to Chapter 11 survival rates. Moreover, based on market values, creditors in going-concern auctions recover a similar fraction of face value as creditors of much larger firms in Chapter 11 reorganizations. The evidence presented here suggests that the auction bankruptcy system is a surprisingly efficient restructuring mechanism for small firms.

JEL Classification: G33, G34, K22.

Keywords: Auctions, Bankruptcy costs, Debt recovery, Prepacks, Chapter 11.

Published in: Journal of Financial Economics, Vol. 58, No. 3, (December 2000), pp. 337-368.

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