Working Papers

Can Strong Creditors Inhibit Entrepreneurial Activity? (with Nuri Ersahin and Rustom Irani) Revise & Resubmit, Review of Financial Studies

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.

Unearthing Zombies (with Nirupama Kulkarni, S. K. Ritadhi, and Siddharth Vij)

The secular rise of zombie borrowers, insolvent firms sustained by continued extension of credit by complicit banks, has been a source of concern for mature and emerging economies alike. Using supervisory data on the universe of large bank-borrower relationships in India, we introduce a novel method for identifying zombies. Although there was widespread non-disclosure of zombies in India in 2014, the beginning of the sample period, there have been major improvements since. We examine changes in zombie reporting around two key policy changes: an overhaul of the bankruptcy code and a regulatory intervention removing lender discretion in bad loan recognition. Increases in reporting were modest after the bankruptcy reform but there was a sizable jump in the recognition of zombies after the regulatory intervention. Post-intervention results show that lending has been reallocated to large, healthy borrowers. However, under-reporting still exists, particularly among public-sector banks. Overall, our results indicate that regulatory action might be necessary, above and beyond bankruptcy reform, to target zombie lending.

Cashing Out: The Rise of M&A in Bankruptcy (with Stuart C. Gilson, Edith S. Hotchkiss, and Matthew G. Osborn)

The use of M&A in bankruptcy has increased dramatically, leading to concerns that Chapter 11 leads to excessive liquidation of viable firms. We examine the drivers of M&A activity, based on factors specific to Chapter 11 as well as more general factors that drive M&A waves for non-distressed firms. M&A in bankruptcy is counter-cyclical, and is more likely when the costs of financing a reorganization are greater than financing costs to a potential acquirer. Consistent with a senior creditor liquidation bias, the greater use of secured debt leads to more sales in bankruptcy, but this result holds only for sales that preserve going concern value. We also show that overall creditor recovery rates are higher for firms with more secured debt, and that recoveries and post-bankruptcy survival rates are not different when bankrupt firms sell businesses as going concerns versus reorganizing independently. Our results are consistent with the efficient redeployment of assets via sales in bankruptcy.

Common Ownership and Startup Growth (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 raise 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. These findings challenge the received wisdom that weak governance is bad.

How Do Firms Use Chapter 11? A Taxonomy

The U.S. Bankruptcy Code has been in place for four decades. In this time, a sophisticated cast of distress market participants has arisen and courts have worked to achieve transparency and verifiability in asset valuation. It is a puzzle, therefore, that corporations in the U.S. should file for bankruptcy at all. This paper constructs an empirical taxonomy of large Chapter 11 debtors based on their objectives and preparation at the time of filing. Approximately two thirds of the firms in the sample set out to reorganize while the remaining third aim to sell substantially all of their assets, either as a going concern or in liquidation. Nearly 60% of firms enter bankruptcy having undergone a thorough marketing of their assets or with a pre-arranged plan of reorganization in place. These findings suggest that, while the majority of large corporations use Chapter 11 to cure hold-outs or capture direct financial benefits afforded by the Bankruptcy Code, some cases may still involve strategic gaming and the exploitation of informational frictions.

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.



Negotiation and Control in Chapter 11

Restructuring Support Agreements: An Empirical Analysis (with Anthony J. Casey and Frederick Tung)

FOSTERing a New Approach to Corporate Risk Management (with Lee Pinkowitz and Rohan Williamson)

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



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.