Mike Burkart, London School of Economics and Political Science
Samuel Lee, Santa Clara University
Vladimir Vladimirov, University of Amsterdam
Abstract: We study the role of bankruptcy law within a market for corporate influence. In our theory, the bankruptcy system addresses collective action failures along two dimensions: consensus finding among claimants and trading claims to investors who seek to influence the consensus-finding process. The ideal law provides avenues for rent-seeking within a cooperative framework. Such a law induces activist investing and trading in distressed claims, contrary to the impression that bankruptcy “replaces” markets with courts.
Discussant: Jason Roderick Donaldson, Washington University-St. Louis
Abstract: This paper investigates the role of rights offerings in bankruptcy as a new market-based mechanism for resolving valuation uncertainties in U.S. Chapter 11 reorganizations. Using hand-collected data on rights offerings in bankruptcy, I document three novel facts: (i) in the last decade, they were used to finance 47% of bankruptcies, (ii) hedge funds or private equity firms generally propose and underwrite them, and (iii) their occurrence is highly correlated with the performance of the stock market. In an instrumental variable setting, I find that compared with other sources of financing, rights offerings lead to higher recovery rates, shorter time spent in Chapter 11, and lower bankruptcy refiling rates. They also allow firms to access new capital without resorting to asset liquidations, which are value-reducing. My findings suggest that by alleviating key bargaining frictions in large and complex bankruptcy cases, rights offerings may improve the efficiency of resource allocation in the economy.
Discussant: Rustom Irani, University of Illinois-Urbana-Champaign
