Financial markets and bankruptcy systems : is there a relationship?

Abstract

Purpose: Filling the cognitive gap in the theory of ex-post transaction costs, i.e., at the stage of enforcing market transactions by examining the relationship between friendliness/severity of the bankruptcy and restructuring law towards debtors, the level of development of financial markets, the effectiveness of the judicial system and the rate of debt recovery. Design/Methodology/Approach: In the research, the following methods were used: literature review, cluster, and panel analysis. Findings: Based on the research, the existence of a statistical relationship was proven between the effectiveness of bankruptcy systems (measured by the recovery rate) and factors characterizing the level of development of the financial market as well as the severity of bankruptcy law towards debtors and the effectiveness of the judicial system. Practical Implications: Research shows that the development of the financial market, and the debt market, in particular, forces countries to put more emphasis on the effectiveness of judicial systems and to create more stringent bankruptcy laws for debtors (more creditor-friendly). Originality/value: This is the first study of its type. In the next stage of the research, the authors want to additionally include such variables as the type of the legal system (statutory law vs. common law) and its origin, the form of organization of the financial market, and at the same time, the banking system model (the Anglo-Saxon and continental models), the effectiveness of conducted restructuring measures, the level of development of countries.