Optimal Timing and Legal Decisionmaking: The Case of the Liquidation Decision in Bankruptcy

University of Chicago Law School, John M. Olin Law & Economics Working Paper No. 86

73 Pages Posted: 20 Oct 1999

See all articles by Douglas G. Baird

Douglas G. Baird

University of Chicago Law School

Edward R. Morrison

Columbia Law School

Date Written: October 1999

Abstract

Until the firm is sold or a plan of reorganization is confirmed, Chapter 11 entrusts a judge with the decision of whether to keep a firm as a going concern or to shut it down. The judge revisits this liquidation decision multiple times. The key is to make the correct decision at the optimal time. This paper models this decision as the exercise of a real option and shows that it depends critically on particular types of information about the firm and its industry. Liquidations take place too soon if we merely compare the liquidation value of the assets with the expected earnings of the firm. Moreover, existing law undermines effective decisionmaking. Even though the judge makes the liquidation decision, a number of rules prevent the judge from controlling the timing of the decision, and those who do control it lack the incentive to ensure it is made at the optimal time. The paper introduces a framework that can illuminate many areas of law, such as summary judgment motions, parole, and agency rule making.

Suggested Citation

Baird, Douglas G. and Morrison, Edward R., Optimal Timing and Legal Decisionmaking: The Case of the Liquidation Decision in Bankruptcy (October 1999). University of Chicago Law School, John M. Olin Law & Economics Working Paper No. 86, Available at SSRN: https://ssrn.com/abstract=187848 or http://dx.doi.org/10.2139/ssrn.187848

Douglas G. Baird (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9571 (Phone)
773-702-0730 (Fax)

Edward R. Morrison

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
938
Abstract Views
3,736
rank
26,722
PlumX Metrics