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Judicial Discretion in Corporate Bankruptcy

  • Gennaioli, Nicola
  • Rossi, Stefano

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" towards inefficient uses of judicial discretion. The comparative statics of our 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.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/15739/1/WP2008-5a.pdf
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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-5.

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Length: 40 p.
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:hit:hitcei:2008-5
Note: This version: December 2007
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  1. Nicola Gennaioli & Andrei Shleifer, 2006. "Judicial Fact Discretion," NBER Working Papers 12679, National Bureau of Economic Research, Inc.
  2. 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.
  3. Alan Schwartz, 1997. "Contracting About Bankruptcy," Yale School of Management Working Papers ysm71, Yale School of Management.
  4. Dan Bernhardt & Ed Nosal, 2004. "Near-sighted Justice," Journal of Finance, American Finance Association, vol. 59(6), pages 2655-2684, December.
  5. 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.
  6. Kenneth Ayotte & Hayong Yun, . "Matching Bankruptcy Laws to Legal Environments," American Law & Economics Association Annual Meetings 1018, American Law & Economics Association.
  7. 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.
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