Time to resolve insolvency and political elections

Theories on electoral accountability argue that politicians have strong incentives to avoid punishment from voters for poor administrative abilities. As their chances of reelection can be harmed by failure of businesses, politicians may encourage the speed up of insolvency proceedings to mitigate the voters’ punishment before the elections. Using a sample of 82 countries covering the period 2005–2017, we examined how legislative and presidential elections affect the time required to resolve corporate insolvency. Surprisingly, panel estimates reveal that the length of time to resolve insolvency tends to actually increase during periods of legislative elections and one year prior to such elections in the case of rehabilitation procedures. As the political agenda of the new government can affect the efficiency of restructuring plans, the uncertainty of legislative election outcomes can incentivize debtor and creditors to prolong the resolution of a firm’s reorganization to adjust the plan and/or adopt the most suitable plan. Additionally, our econometric approach reports no significant association between the duration of insolvency procedures and the cycle of presidential elections.