Judicial Discretion In Corporate Bankruptcy
Source: Universitat Pompeu Fabra
The authors study a demand and supply model of judicial discretion in corporate bankruptcy. On the supply side, they assume that bankruptcy courts may be biased for debtors or creditors, and subject to career concerns. On the demand side, they assume that debtors (and creditors) can engage in forum shopping at some cost. A key finding is that stronger creditor protection in reorganization improves judicial incentives to resolve financial distress efficiently, preventing a "Race to the bottom" towards inefficient uses of judicial discretion. The comparative statics of their model shed light on a wealth of evidence on U.S. bankruptcy and yield novel predictions on how bankruptcy codes should affect firm-level outcomes.