This study examines whether a bankruptcy law could encourage a financially distressed borrower to file a bankruptcy reorganization plan earlier. Povel (1999) points out that “Early rescues of a firm are typically cheaper than late rescues, and are more likely to be successful.” In Japan, the Civil Rehabilitation Law went into effect in 2000. This law is expected to give incentives to begin the process of reconstruction earlier. We measure the time from when a firm experiences a serious decline in its performance until when it files for bankruptcy, and examine the difference between before and after the law came into effect. The results show that, before the law took effect, it took about five years on average, while it takes only one year since that.
