Judge Specific Differences in Chapter 11 and Firm Outcomes

Abstract:     
This paper uses information on Chapter 11 filings for almost 5000 private companies across five district courts in the US between 1989 and 2003. For each case we code the entire docket of the case, in particular all the decisions that the judge made during a Chapter 11 process. We first establish that while there are some significant differences across districts in the types of firms that file for Chapter 11, within districts cases appear to be assigned randomly to judges. We then estimate judge specific fixed effects to analyze whether judges differ systematically in their Chapter 11 rulings. We find very strong and economically significant differences across judges in their propensity to grant or deny specific motions. Some judges appear to rule persistently more favorably towards allowing the use of cash collateral, lifting the automatic stay or conversion of cases into other chapters such as 7. In a next step, we use the estimated judge fixed effects to instrument for the exogenous variation in the propensity to grant a specific motion. We show that the use of cash collateral and the extension of the exclusivity period increase a firm's likelihood of re-filing for bankruptcy. Finally, based on the judge fixed effects we also created an aggregate index to measure the pro-debtor (pro-creditor) friendliness of the judges. We provide suggestive evidence that a pro-management bias leads to increased rates of re-filing and lower post-bankruptcy credit ratings.

Keywords: bankruptcy, Chapter 11

JEL Classifications: G33, G3

Working Paper Series