Restructurings versus Bankruptcy Buy-Backs: A Study of the Swedish Insolvency Legislation

Abstract: This paper compares the Swedish Bankruptcy Act and Business Reorganization Act as tools for restructuring financially distressed firms. The study is performed through an empirical investigation of the two laws with respect to the pre-filing financial characteristics and post-performance of the firms under each procedure. The results show that firms filing for the Business Reorganization Act show worse performance before the filing than buy-backs under the Bankruptcy Act, and have a lower survival rate after the procedure. However, there is no evidence that one of the procedures provides better improvements than the other. The results also show that intangible assets decrease the probability of a buy-back while accounts payable increase the probability of a restructuring. The study suggests that the Business Reorganization Act has failed its purpose and that the Swedish insolvency legislation needs to be revised in order to align the two procedures.