Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies

48 Pages Posted: 8 Dec 2017 Last revised: 3 Aug 2020

See all articles by Benjamin Charles Iverson

Benjamin Charles Iverson

Brigham Young University

Joshua Madsen

University of Minnesota - Twin Cities - Carlson School of Management

Wei Wang

Queen's University - Smith School of Business

Qiping Xu

University of Illinois Urbana Champaign

Date Written: August 1, 2020

Abstract

Exploiting the random assignment of corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges' significant prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy and realize 12 percentage point lower creditor recovery rates. Judges' learning curve is one year for small business cases and four years for more complex public firms. Exposure to more corporate cases and a greater diversity of businesses accelerate judges' learning. Conservative estimates suggest that slight policy adjustments could increase creditor recoveries by approximately $20 billion for our sample public firms.

Keywords: bankruptcy judges, human capital, learning by doing, job-specific skills, inexperience

JEL Classification: G33, G34, J24

Suggested Citation

Iverson, Benjamin Charles and Madsen, Joshua and Wang, Wei and Xu, Qiping, Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3084318 or http://dx.doi.org/10.2139/ssrn.3084318

Benjamin Charles Iverson

Brigham Young University ( email )

United States

Joshua Madsen

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Qiping Xu (Contact Author)

University of Illinois Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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