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Judicial Discretion in Corporate Bankruptcy

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  • Nicola Gennaioli
  • Stefano Rossi

Abstract

We study a demand-and-supply model of judicial discretion in corporate bankruptcy. On the supply side, we assume that bankruptcy courts may be biased for debtors or creditors, and subject to career concerns. On the demand side, we 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" toward inefficient uses of judicial discretion. The comparative statics of our model shed light on a lot of evidence on U.S. bankruptcy and yield novel predictions on how bankruptcy codes should affect firm-level outcomes. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Nicola Gennaioli & Stefano Rossi, 2010. "Judicial Discretion in Corporate Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 4078-4114, November.
  • Handle: RePEc:oup:rfinst:v:23:y:2010:i:11:p:4078-4114
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    References listed on IDEAS

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    1. Dan Bernhardt & Ed Nosal, 2004. "Near-sighted Justice," Journal of Finance, American Finance Association, vol. 59(6), pages 2655-2684, December.
    2. Julian R. Franks & Kjell G. Nyborg & Walter N. Torous, 1996. "A Comparison of UK, US and German Insolvency Codes," Financial Management, Financial Management Association, vol. 25(3), Fall.
    3. Schwartz, Alan, 1997. "Contracting about Bankruptcy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(1), pages 127-146, April.
    4. Nicola Gennaioli & Andrei Shleifer, 2008. "Judicial Fact Discretion," The Journal of Legal Studies, University of Chicago Press, pages 1-35.
    5. Kenneth Ayotte & Hayong Yun, "undated". "Matching Bankruptcy Laws to Legal Environments," American Law & Economics Association Annual Meetings 1018, American Law & Economics Association.
    6. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    7. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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    Citations

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    Cited by:

    1. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," Review of Financial Studies, Society for Financial Studies, pages 602-634.
    2. Rodano, Giacomo & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2016. "Bankruptcy law and bank financing," Journal of Financial Economics, Elsevier, vol. 120(2), pages 363-382.
    3. Tarantino, Emanuele, 2013. "Bankruptcy law and corporate investment decisions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2490-2500.
    4. Sreyan Chatterjee & Gausia Shaikh & Bhargavi Zaveri, 2017. "Watching India's Insolvency Reforms: A New Dataset of Insolvency Cases," Working Papers id:12105, eSocialSciences.
    5. Sreyan Chatterjee & Gausia Shaikh & Bhargavi Zaveri, 2017. "Watching India's insolvency reforms: A New dataset of insolvency cases," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2017-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    6. Cesar Tamayo, 2015. "Investor protection and optimal contracts under risk aversion and costly state verification," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 547-577.
    7. Rachidi Kotchoni & Dalibor Stevanovic, 2013. "Probability and Severity of Recessions," CIRANO Working Papers 2013s-43, CIRANO.
    8. Meradj Mortezapouraghdam, 2016. "Three Essays on the Role of Frictions in the Economy," Sciences Po publications info:hdl:2441/293qice3lj8, Sciences Po.
    9. Leyman, Bart & Schoors, Koen J.L. & Coussement, Peter, 2011. "Does court-supervised reorganization work? Evidence from post-confirmation firm failure," International Review of Law and Economics, Elsevier, vol. 31(3), pages 149-168, September.

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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