Abstract
Spanish small businesses rarely file for bankruptcy, and Spanish bankruptcy rates are abnormally small. The historical inadequacy of the Spanish insolvency system has led most enterprises to rely on the de facto alternative mortgage system and to overinvest in fixed tangible assets: a distortion that may trigger significant adverse effects, for instance on the enabling environment of novel entrepreneurship. The reform of the bankruptcy law that took place in Spain some 10 years in order to modernise the insolvency system involved, as a main novelty, the establishment of specialised commercial courts (Juzgados de lo Mercantil). Since the net benefits of specialised judicial functions are in principle ambiguous, we study empirically whether these new bodies had any impact, over and above the economic crisis, on the use of the bankruptcy system. Exploiting the staggered timing of the new courts geography, we estimate an endogenous treatment model with a binary policy variable which allows to measure the effect of the reform on bankruptcy rates. The results support the view that the new bankruptcy law took the right path, but the size of the estimated parameters call for further policy efforts in that direction.
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Notes
For a measure of how the rule of law is experienced in practice in different countries see the World Justice Project (WJP) Rule of Law Index 2015. On the global index, Spain ranks 24th out of 102 countries.
Euler Hermes (http://www.eulerhermes.com) is a leading provider of trade-related insurance solutions that publishes regularly an Economic Outlook with worldwide insolvency indicators and country risk assessments. Data on insolvencies come from national statistics and are then homogenised for cross-country comparison. In Table 1a and b below we calculated two different indicators: the business bankruptcy ratio (with the population of active enterprises in the denumerator) and the conditional business bankruptcy ratio (with the number of enterprises that exited the market in the denumerator). On both measures the ranking of Spain remains basically the same. Data on enterprises are taken from OECD Structural and Demographic Business Statistics (http://www.oecd.org).
It goes without saying that the liquidation of secured credits may occur under both regimes. If firms and creditors prefer the mortgage system to filing for bankruptcy, it must be the case that net benefits are bigger under the former than under the latter. Indeed, on some important dimensions, the mortgage system looks very efficient, guaranteeing creditors higher discounted recovery rates and firms (indirectly) better access to credit. According to a survey by the European Mortgage Federation (2007) the time lapse between mortgage foreclosures and the actual distribution of the proceeds of the sale was 7–9 months in Spain, 12 months in Germany, 15–25 months in France and 5–7 years in Italy. At the same time, the median length of a bankruptcy process was between 20 and 23 months. Presumably even higher - if anything - after the 2008 crisis (see also Celentani et al., 2012, p. 27).
Here inefficient liquidation refers to the liquidation of the firm's assets by the creditor even if the project's continuation value is higher than its liquidation value.
Under the Spanish Constitution, unlike an ordinary law, an organic law is required on specific areas of law (e.g. fundamental rights) and must be passed by an absolute majority of the Congress of Deputies. In the present case modifications to both the fundamental rights of the debtors and the judicial organisation prompted this rank of the law.
It is interesting to see how these pitfalls are described in the official motivations (expósition de motivos) of the Ley 22/2003: “Archaism, lack of adaptation to the social and economic reality of our time, dispersion, lack of a harmonic system, prevalence of certain private interests over other more general ones disregarding the principle of equality in treatment of creditors, thus leading to unfair solutions, frequently caused in practice by manoeuvres in bad faith or with abuse or simulation, which the rules that regulate the insolvency institutions do not manage to effectively suppress” (Ministerio de Justicia, 2010, pp. 2).
As told by judge Blas Alberto González Navarro (2008, p. 8), recruiting talented judges turned out to be difficult: "The first edition of the examination was sat by the most well-known Judges, those who had been hearing mercantile cases for years, especially in Madrid and Barcelona, and a second group of Magistrates who were simply interested in the subject… [N]early 150 candidates applied for 50 positions, but only 37 passed the exam. Famous names who at the time were considered the elite of mercantile justice failed." Needless to say, even talented specialized judges might make imperfect decisions, depending on professional experience, isolation, and the lack of percolation of ideas typical of courts with exclusive jurisdiction.
This Figure has been downloaded from http://www.poderjudicial.es/ (01/09/2016).
Las Palmas de Gran Canaria, Santa Cruz de Tenerife, Ceuta and Melilla have been excluded, since the data for these territories are incomplete.
Regional dummies are expected to capture differences in judicial efficiency accross Spain provinces (Mora-Sanguinetti et al, 2017).
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Acknowledgements
C. Detotto acknowledges the financial support by the “Visiting Professor Programme” of the University of Sassari (Resolution No. 53/69 of 20/12/2013). The authors would like to thank an anonymous referee for helpful and valuable comments and suggestions.
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Detotto, C., Serra, L. & Vannini, M. Did specialised courts affect the frequency of business bankruptcy petitions in Spain?. Eur J Law Econ 47, 125–145 (2019). https://doi.org/10.1007/s10657-018-9601-z
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DOI: https://doi.org/10.1007/s10657-018-9601-z