Abstract

http://ssrn.com/abstract=1372574
 
 

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Matching Bankruptcy Laws to Legal Environments


Kenneth Ayotte


Northwestern University School of Law

Hayong Yun


Michigan State University - Department of Finance

May 2009

The Journal of Law, Economics, & Organization, Vol. 25, Issue 1, pp. 2-30, 2009

Abstract:     
We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the expertise of judges and the quality of contract enforcement. We analyze a model in which a judicially influenced bankruptcy process can enhance the efficiency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on firm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment and show that the optimal degree of “creditor-friendliness” in the bankruptcy code increases as judicial ability to recognize firm quality falls and as the quality of contract enforcement deteriorates. Our model shows that a bankruptcy law that attempts to preserve going-concern value, such as US Chapter 11, requires judicial expertise to be effective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. (JEL D86, G33, G34, K22)

Accepted Paper Series


Not Available For Download

Date posted: April 13, 2009  

Suggested Citation

Ayotte, Kenneth and Yun, Hayong, Matching Bankruptcy Laws to Legal Environments (May 2009). The Journal of Law, Economics, & Organization, Vol. 25, Issue 1, pp. 2-30, 2009. Available at SSRN: http://ssrn.com/abstract=1372574 or http://dx.doi.org/10.1093/jleo/ewm048

Contact Information

Kenneth Ayotte (Contact Author)
Northwestern University School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
Hayong Yun
Michigan State University - Department of Finance ( email )
645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)
HOME PAGE: http://https://sites.google.com/site/hayongy/
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