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Financial Costs of Judicial Inexperience: Evidence From Corporate Bankruptcies

Published online by Cambridge University Press:  11 July 2022

Benjamin Iverson Open the ORCID record for Benjamin Iverson [Opens in a new window] ,
Joshua Madsen ,
Wei Wang  and
Qiping Xu
Benjamin Iverson*
Affiliation:
Brigham Young University Marriott School of Business
Joshua Madsen
Affiliation:
University of Minnesota Carlson School of Management [email protected]
Wei Wang
Affiliation:
Queen’s University Smith School of Business [email protected]
Qiping Xu
Affiliation:
University of Illinois Gies College of Business [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 3 , May 2023 , pp. 1111 - 1143
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Judge Shelley Chapman (United States Bankruptcy Court, Southern District of New York), Judge William Fisher (United States Bankruptcy Court, District of Minnesota), and Judge Brendan Shannon (United States Bankruptcy Court, District of Delaware) for institutional knowledge regarding judge assignments and rulings. We are grateful for comments from Shai Bernstein, Dennis Campbell, Tom Chang, Ed deHaan, Paul Healy, Allen Huang, Michael Iselin, Mathias Kronlund, Pedro Matos, Karsten Mueller, Tjomme Rusticus, Bob Simons, Manpreet Singh, Suraj Srinivasan, Veikko Thiele, Paul Vaaler, Charlie Wang, and Jan Zabojnik as well as conference and seminar participants at the University of Notre Dame, Harvard University, Queen’s University, the University of Minnesota Carlson School of Management, the University of Minnesota Law School, the University of Utah, the University of Texas – Dallas, the 2018 WFA, the 2018 Wabash River Finance Conference, the 2018 FMA, the 2018 Conference on Empirical Legal Studies, the 2018 EFA, the 2019 AFA, and the 2019 FIRS. We thank Carmen Chen, Roi Levy, Kayvn Mihan, Mitch Schinbein, Vania Shi, Erin Shin, Josh Stoddard, and Shimei Zhou for excellent research assistance. All errors are our own.

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