Bankruptcy Claim Dischargeability and Public Externalities: Evidence from a Natural Experiment

102 Pages Posted: 16 Nov 2018 Last revised: 21 Feb 2020

See all articles by Michael Ohlrogge

Michael Ohlrogge

New York University School of Law

Date Written: February 14, 2020

Abstract

In 2009, the Seventh Circuit ruled in U.S. v. Apex Oil that certain types of injunctions requiring firms to clean up previously released toxic chemicals were not dischargeable in bankruptcy. This was widely perceived to represent a split with Sixth Circuit precedent, although Supreme Court cert was denied. Numerous legal commentators wrote of the significance of this decision in strengthening incentives for firms, and their creditors, to reduce the likelihood of costly environmental damage that would no longer be dischargeable in the event of bankruptcy. I show using difference in differences and triple difference methodologies that companies whose operations are confined to the Seventh Circuit (and thus likely to file for bankruptcy there) responded by reducing the volume of toxic chemicals they release on-site by approximately 15%. In place of these releases, firms substituted off-site treatment by specialized facilities generally considered to be safer for the environment. I also show evidence of a tightening of credit to impacted firms, helping shed light on the mechanism of influence via pressure from creditors. These results point to important ways in which bankruptcy law and other legal rules that impact recovery for firms’ creditors can work to shape the positive or negative externalities those firms generate.

Keywords: Bankruptcy; Corporate Governance; Externalities; RCRA; Toxics Release Inventory

JEL Classification: G33, G34, G38, K22, K42, Q53, Q58, P48

Suggested Citation

Ohlrogge, Michael, Bankruptcy Claim Dischargeability and Public Externalities: Evidence from a Natural Experiment (February 14, 2020). Available at SSRN: https://ssrn.com/abstract=3273486 or http://dx.doi.org/10.2139/ssrn.3273486

Michael Ohlrogge (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
133
Abstract Views
975
rank
235,066
PlumX Metrics