Research

Working Papers

Unsecured Creditor Control in Chapter 11

In Chapter 11 bankruptcy, certain control rights are assigned to an official committee of unsecured creditors. This paper investigates the impact of the official committee on Chapter 11 outcomes using a novel dataset built from raw court documents that covers all cases from 2004-2014 with over $10 million in assets. We find that the existence of an official committee is associated with a 7-11% increase in the likelihood that the firm is acquired. It also leads to a reduction in the amount of time spent in bankruptcy, particularly for firms that end up acquired. In addition to the main results, we also find that membership composition matters and that certain influential creditors are associated with higher rates of reorganization when they are present on the official committee.

Can Strong Creditors Inhibit Entrepreneurial Activity? (with Nuri Ersahin and Rustom Irani)

We examine startup entry and exit activity following the staggered adoption of modern-day fraudulent transfer laws in the United States. These laws strengthen unsecured creditors’ rights and are particularly important for entrepreneurs whose personal assets commingle with the firm’s. Using administrative data from the U.S. Census Bureau, we document declines in startup entry, churning among entrants, and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing unsecured credit. Our results suggest that excessive creditor rights can reduce entrepreneurs’ appetite for risk, thereby slowing down the extensive margin process of reallocating resources from failing to new businesses.

Customizing Governance to Attract Capital (with Ofer Eldar and Jillian P. Grennan)

We examine whether and to what extent a corporation’s ability to waive the corporate opportunity doctrine, which constrains directors from following conflicted interests, helps it to capital. We use the staggered adoption of state legislation to identify if this weaker form of governance can be a tool for attracting venture capital (VC) and private equity (PE) investment. We find that this ability to customize corporate governance is associated with more deals, larger deal values, and more late-stage investments. The capital is accompanied by more directorships for VC and PE investors and a thickening of those investors’ overall networks among firms in treated states.

Intended and Unintended Bankruptcy Outcomes

Chapter 11 has evolved into tool that is used by firms to achieve advantageous M&A and liquidation outcomes in addition to financial reorganizations. It is still common for academics to evaluate bankruptcy outcomes based solely on the realization of a reorganization or liquidation, however, rather than on deviation from intent. I utilize first-day declarations to classify debtors’ initial objectives in a sample of 411 large bankruptcy cases that did not involve pre-packaged plans or pre-arranged sales. I find that 24% of these firms set out to achieve Chapter 11 acquisitions or liquidations and that only 16% were ultimately liquidated even though they had initially intended to continue as a going concern. In addition, I find that debtors that fail to restructure differ systematically from debtors that fail to be acquired. Taken together, these findings indicate that firms are generally capable of anticipating and best responding to the Chapter 11 bankruptcy process.

Online Appendix Files: Classifier Features, Cause Bigrams, Cause Words

WORKS IN PROGRESS

Negotiation in Chapter 11  Draft coming soon

The Evolution of Risk: Evidence from Natural Language Processing (with Lee Pinkowitz and Rohan Williamson)

Spillover Effects of Bankruptcy: Evidence from the Indian Insolvency and Bankruptcy Code (with Nirupama Kulkarni, S.K. Ritadhi, and Siddharth Vij)

Multinational Bankruptcy (with James Albertus, Sreedhar Bharath, and Edith Hotchkiss)

 

Policy

The Budgetary Impact of Ending Drug Prohibition with Jeffrey Miron (2010)

State and federal governments in the United States face massive looming fiscal deficits. One policy change that can reduce deficits is ending the drug war. Legalization means reduced expenditure on enforcement and an increase in tax revenue from legalized sales. This report estimates that legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition. Of these savings, $25.7 billion would accrue to state and local governments, while $15.6 billion would accrue to the federal government. Approximately $8.7 billion of the savings would result from legalization of marijuana and $32.6 billion from legalization of other drugs. The report also estimates that drug legalization would yield tax revenue of $46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco. Approximately $8.7 billion of this revenue would result from legalization of marijuana and $38.0 billion from legalization of other drugs.