Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts

Benjamin Iverson ()
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Benjamin Iverson: Marriott School of Management, Brigham Young University, Provo, Utah 84602; Kellogg School of Management, Northwestern University, Evanston, Illinois 60208

Management Science, 2018, vol. 64, issue 11, 5370-5394

Abstract: Bankruptcy costs depend not only on the laws that govern financial distress but also on the ability of the court to rehabilitate distressed firms. This paper tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act as an exogenous shock to caseloads, I find that commercial banks report lower charge-offs on business lending when court caseloads decline, suggesting that the costs of financial distress are lower in less-congested courts. Further, court caseload affects how restructuring takes place. Less-busy bankruptcy judges liquidate fewer small firms, but more large firms. When caseload declines, large firms spend less time in court and firms that are dismissed from court are less likely to refile for bankruptcy. In addition, firms are less likely to sell assets or obtain debtor-in-possession financing in less-busy courts.

Keywords: financial distress; bankruptcy; Chapter 11; time constraints (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:11:p:5370-5394

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