Judicial Discretion in Corporate Bankruptcy

47 Pages Posted: 4 Dec 2007 Last revised: 21 Jan 2009

See all articles by Nicola Gennaioli

Nicola Gennaioli

Bocconi University - Department of Finance

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: January 19, 2009

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" 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.

Keywords: Judicial Discretion, Corporate Bankruptcy

JEL Classification: G33, K22

Suggested Citation

Gennaioli, Nicola and Rossi, Stefano, Judicial Discretion in Corporate Bankruptcy (January 19, 2009). UBC Winter Finance Conference 2008 Paper, EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1051441 or http://dx.doi.org/10.2139/ssrn.1051441

Nicola Gennaioli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Stefano Rossi (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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