Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-27T17:42:17.337Z Has data issue: false hasContentIssue false
  • English
  • Français

Bankruptcies, bailouts, and some political economy of corporate reorganization

Published online by Cambridge University Press:  19 February 2018

DYLAN DELLISANTI  and
RICHARD E. WAGNER
DYLAN DELLISANTI*
Affiliation:
Department of Economics, George Mason University, Fairfax, VA 22030, USA
RICHARD E. WAGNER*
Affiliation:
Department of Economics, George Mason University, Fairfax, VA 22030, USA
*
*Email: [email protected]
**Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Bankruptcy has long been the standard approach to reorganizing failing corporate entities. In recent years, bailout, whereby a governmental entity takes charge of the reorganization, has appeared as an alternative. At the enterprise level, there is a Coase-like invariance proposition at work in which a failing concern is replaced by a going concern under either process. Significant differences arise once we move beyond the point of reorganization. The choice between bankruptcy and bailout is fundamentally a choice between alternative arrangements for corporate governance, and not about transforming failing concerns into going concerns because this will happen under either arrangement. We argue that political entanglement in corporate restructuring will tend to preclude the entrepreneurial discovery process. We recount the recent American auto and financial industry bailouts, highlighting how each episode was guided by political considerations, which served to distract the restructuring process from discovering those opportunities that market-based restructuring would have discovered.

Type
Research Article
Information
Journal of Institutional Economics , Volume 14 , Issue 5 , October 2018 , pp. 833 - 851
Copyright
Copyright © Millennium Economics Ltd 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Afonso, G., Santos, J. and Traina, J. (2014), ‘Do “Too-Big-To-Fail” Banks Take on More Risk?’ Federal Reserve Bank of New York Economic Policy Review, 20 (2): 1–18.Google Scholar
Ayotte, K. and Skeel, D. (2010), ‘Bankruptcy or Bailouts’, Journal of Corporation Law, 35: 469–98.Google Scholar
Blau, B., Brough, T. and Thomas, D. (2013), ‘Corporate Lobbying, Political Connections, and the Bailout of Banks’, Journal of Banking and Finance, 37 (8): 3007–17.Google Scholar
Buchanan, J. and Tullock, G. (1962), The Calculus of Consent, Ann Arbor, MI: University of Michigan Press.Google Scholar
Casey, A. and Posner, E. (2015), ‘A Framework for Bailout Regulation’, Notre Dame Law Review, 91 (2): 479–536.Google Scholar
De la Merced, M. (2009), ‘A Road Map to a Chrysler Bankruptcy’, New York Times [online]. Available at: http://dealbook.blogs.nytimes.com/2009/04/30/a-roadmap-to-a-chrysler-bankruptcy/ (accessed 29 January 2018).Google Scholar
Faccio, M., Masulis, R. and McConnell, J. (2006), ‘Political Connections and Corporate Bailouts’, Journal of Finance, 61 (6): 2597–635.Google Scholar
Hayek, F. A. (1945), ‘The Use of Knowledge in Society’, American Economic Review, 35 (4): 519–30.Google Scholar
Hayek, F. A. (2002), ‘Competition as a Discovery Procedure’, Quarterly Journal of Austrian Economics, 5 (3): 9–23.Google Scholar
Kang, Y. (2015), ‘Staples Blasts FTC's Blocking of $6.3B Office Depot Merger’, Law360.com [online]. Available at: https://www.law360.com/articles/741771/staples-blasts-ftc-s-blocking-of-6-3b-office-depot-merger (accessed 29 January 2018).Google Scholar
Kirzner, I. (1973), Competition and Entrepreneurship. Chicago: University of Chicago Press.Google Scholar
Krueger, A. and Goolsbee, A. (2015), ‘A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler’, Journal of Economic Perspectives, 29 (2): 3–23.Google Scholar
Kovacevich, R. (2014), ‘The Financial Crisis: Why the Conventional Wisdom has it all Wrong’, Cato Journal, 34 (3): 541–56.Google Scholar
Lander, M. and Dash, E. (2008), ‘Drama behind a $250 Billion Banking Deal’, New York Times [online]. Available at: www.nytimes.com/2008/10/15/business/economy/15bailout.html (accessed 29 January 2018).Google Scholar
Lawson, G. (2010), ‘Burying the Constitution under a TARP’, Harvard Journal of Law and Public Policy, 33 (1), Boston University School of Law Working Paper No. 09–31 [online]. Available at SSRN: https://ssrn.com/abstract=1436462 (accessed 29 January 2018).Google Scholar
Mahoney, J. (2016), ‘Takings, Legitimacy, and Emergency Action: Lessons from the Financial Crisis of 2008’, George Mason Law Review, 23 (2): 299–320.Google Scholar
Markham, J. (2011), ‘The Financial Stability Oversight Council – Risk Manager or Debating Society?’ Journal of Financial Transformation, 33: 35–43.Google Scholar
Merle, R. (2016), ‘Metlife's escape of “too big to fail” is defeat for Obama administration’, Washington Post [online]. Available at: https://www.washingtonpost.com/business/economy/metlifes-escape-of-too-big-to-fail-label-is-defeat-for-obama-administration/2016/03/30/9b9859b4-f6a3-11e5-a3ce-f06b5ba21f33_story.html?utm_term=.ace0fa5a4b4c (accessed 29 January 2018).Google Scholar
Moberg, L. and Wagner, R. E. (2014), ‘Default without Capital Account: The Economics of Municipal Bankruptcy’, Public Finance and Management, 14 (1): 30–47.Google Scholar
Schultze, G. (2014), ‘The Story behind Chrysler and Fiat, and Why the Stock Is So Cheap’, Forbes [online]. Available at: https://www.forbes.com/sites/halahtouryalai/2014/01/07/the-story-behind-chrysler-and-fiat-and-why-the-stock-is-so-cheap/#322fc23c67d7 (accessed 29 January 2018).Google Scholar
Skeel, D. (2015), ‘From Chrysler and General Motors to Detroit’, Penn Law: Legal Scholarship Repository, Paper 1420: 121–48.Google Scholar
Solomon, D., 2009, ‘Market Pans Bank Rescue Plan’. Wall Street Journal [online]. Available at: https://www.wsj.com/articles/SB123427167262568141 (accessed 29 January 2018).Google Scholar
Smith, A., Wagner, R. and Yandle, B. (2011), ‘A Theory of Entangled Political Economy, with Application to TARP and NRA’, Public Choice, 148 (1–2): 45–66.Google Scholar
Thalman, M. (2016), ‘Office Depot and Staples Are Both Doomed Following Failed Merger’, thestreet.com [online]. Available at: https://www.thestreet.com/story/13575419/1/office-depot-and-staples-are-both-doomed-following-failed-merger.html (accessed 29 January 2018).Google Scholar
Varmaz, A., Fieberg, C. and Prokop, J. (2015), ‘The Value Relevance of “Too-Big-to-Fail” Guarantees’, Journal of Risk Finance, 16 (5): 498–518.Google Scholar
Wagner, R. (2012), ‘Viennese Kaleidics: Why it's Liberty more than Policy that Calms Turbulence’, Review of Austrian Economics, 25 (4): 283–97.Google Scholar
Wagner, R. (2016), Politics as a Peculiar Business, Cheltenham: Edward Elgar.Google Scholar
Yu, S. and Lee, N. (2016), ‘Financial Crisis, Politically Connected CEOs, and the Performance of State-Owned Enterprises: Evidence from Korea’, Emerging Markets Finance and Trade, 52 (9): 2087–99.Google Scholar
Zywicki, T. (2011a), ‘The Auto Bailout and the Rule of Law’, National Affairs, 7: 66–80.Google Scholar
Zywicki, T. (2011b), ‘Economic Uncertainty, the Courts, and the Rule of Law’, Harvard Journal of Law and Public Policy, 35 (1): 195–212.Google Scholar
Zywicki, T. (2015), ‘Rent-Seeking, Crony Capitalism, and the Crony Constitution’, Supreme Court Economic Review, 23: 77–103.Google Scholar