Abstract:
The present thesis examines the determinants of the bankruptcy protection
duration for Canadian firms. Using a sample of Canadian firms that filed for
bankruptcy protection between the calendar years 1992 and 2009, we fmd that the
firm age, the industry adjusted operating margin, the default spread, the industrial
production growth rate or the interest rate are influential factors on determining the
length of the protection period. Older firms tend to stay longer under protection from
creditors. As older firms have more complicated structures and issues to settle, the
risk of exiting soon the protection (the hazard rate) is small. We also find that firms
that perform better than their benchmark as measured by the industry they belong to,
tend to leave quickly the bankruptcy protection state. We conclude that the fate of
relatively successful companies is determined faster. Moreover, we report that it takes
less time to achieve a final solution to firms under bankrupt~y when the default spread
is low or when the appetite for risk is high. Conversely, during periods of high default
spreads and flight for quality, it takes longer time to resolve the bankruptcy issue. This
last finding may suggest that troubled firms should place themselves under protection
when spreads are low. However, this ignores the endogeneity issue: high default
spread may cause and incidentally reflect higher bankruptcy rates in the economy.
Indeed, we find that bankruptcy protection is longer during economic downturns. We
explain this relation by the natural increase in default rate among firms (and
individuals) during economically troubled times. Default spreads are usually larger
during these harsh periods as investors become more risk averse since their wealth shrinks.
Using a Log-logistic hazard model, we also fmd that firms that file under the
Companies' Creditors Arrangement Act (CCAA) protection spend longer time
restructuring than firms that filed under the Bankruptcy and Insolvency Act (BIA). As
BIA is more statutory and less flexible, solutions can be reached faster by court
orders.
