What Drives Bankruptcy Forum Shopping? Evidence from Market Data

Abstract

Over the past thirty years, the majority of large firms that filed for bankruptcy did so in the U.S. bankruptcy courts of the Southern District of New York and Delaware. Some believe these experienced courts dominate because their expertise makes bankruptcy more predictable. Critics dispute this explanation, arguing instead that “predictability” is a cloak for the true, self-interested motivation of the debtor’s managers, lawyers and senior creditors that influence the debtor’s venue decision. In this paper, I look for evidence supporting the views of the proponents and detractors of bankruptcy forum shopping in a large sample of market data. My results suggest that the market is better at predicting the outcomes of bankruptcy cases in New York and Delaware, consistent with the hypothesis that the law there is more predictable. I do not find evidence supporting the view that those courts are biased in favor of senior creditors.

Keywords: bankruptcy; Chapter 11; courts; markets; corporate finance; judges; corporate reorganization; corporate restructuring

JEL Classification: G23, G30, G33