Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies

Exploiting the random assignment of corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges' significant prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy and realize 12 percentage point lower creditor recovery rates. Judges' learning curve is one year for small business cases and four years for more complex public firms. Exposure to more corporate cases and a greater diversity of businesses accelerate judges' learning. Conservative estimates suggest that slight policy adjustments could increase creditor recoveries by approximately $20 billion for our sample public firms.

Keywords: bankruptcy judges, human capital, learning by doing, job-specific skills, inexperience

JEL Classification: G33, G34, J24

Suggested Citation: Suggested Citation

Iverson, Benjamin Charles and Madsen, Joshua and Wang, Wei and Xu, Qiping, Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3084318 or http://dx.doi.org/10.2139/ssrn.3084318