Causes and resolution of bankruptcy: The efficiency of the law

The principal aim of this study is to analyze the effect of bankruptcy causes in its resolution. In furthering this purpose, a bankruptcy index is proposed, like a combination between the profitability and the leverage of bankrupt firms. This index tries to determine if the origin of the bankruptcy is mainly economic, financial or a combination. This study uses a sample of 1025 Spanish firms that went bankrupt in 2008 and obtained a resolution (reorganization or liquidation) by the end of 2012. The results reveal that a high bankruptcy index, which means low viability, reduces the reorganization probability of bankrupt firms. In addition, these results show that Spanish bankruptcy proceedings have a certain degree of efficiency, in such a way that the viable firms are reorganized and the nonviable firms are liquidated.