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Governance in Financial Distress and Bankruptcy

Oxford Handbook of Corporate Governance, Forthcoming

Northwestern Public Law Research Paper No. 12-37

44 Pages Posted: 16 Nov 2012 Last revised: 29 Dec 2012

Kenneth Ayotte

University of California, Berkeley - School of Law

Edith S. Hotchkiss

Boston College - Carroll School of Management

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: November 15, 2012

Abstract

This chapter, for the Oxford Handbook of Corporate Governance, provides a survey of law, economics, and finance scholarship at the intersection of corporate governance and financial distress. In financial distress, both inside and outside of bankruptcy court, formal and informal control rights are paramount. Thus, we organize our review around the major constituencies that exercise control rights in distressed firms: shareholders, managers and boards; senior and junior creditors; and the law, courts and judges. Broadly, our review suggests that an understanding of the incentives of these constituencies is crucial to explaining outcomes. Our review also documents the paradigm shift in the bankruptcy literature, away from the “safe haven” view of Chapter 11 as a slow, manager and shareholder-controlled reorganization process. Chapter 11 case outcomes are increasingly steered by sophisticated activist investors, generating faster resolutions that are more creditor-controlled. We suggest some directions for future research in light of these developments.

Keywords: bankruptcy, reorganization, corporate finance, corporate governance, Chapter 11

JEL Classification: G30, G33, G34

Suggested Citation

Ayotte, Kenneth and Hotchkiss, Edith S. and Thorburn, Karin S., Governance in Financial Distress and Bankruptcy (November 15, 2012). Oxford Handbook of Corporate Governance, Forthcoming; Northwestern Public Law Research Paper No. 12-37. Available at SSRN: https://ssrn.com/abstract=2176316

Kenneth Ayotte

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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