Are Judges Randomly Assigned to Chapter 11 Bankruptcies? Not According to Hedge Funds
69 Pages Posted: 30 Jan 2022 Last revised: 19 May 2022
Date Written: January 27, 2022
The random assignment of judges to court cases promotes fairness, minimizes forum shopping, and is routinely exploited for causal identification by economists. Analyzing U.S. corporate bankruptcy filings between 2010 and 2020, we provide the first evidence that assignment is not random, but predicted by the lending decisions of hedge funds. In our setting, judges can decide whether to convert a Chapter 11 bankruptcy to a Chapter 7 liquidation; while secured creditors have a preference for liquidation, unsecured creditors generally recover more under reorganization. Exploiting this distinction, we show that relative to secured hedge funds, unsecured hedge fund creditors are significantly less likely to be assigned a judge with a tendency to convert Chapter 11 cases. Effects are largest when the hedge fund has connections with the debtor's board or invested recently, and the gains are similar to the benefits of forum shopping. Explaining these findings, we show judges are not assigned multiple large cases within a small time window, allowing hedge funds to influence the filing date and ultimately judicial assignment. A recentered IV approach that excludes the predictable component of judicial assignment provides researchers an alternative identification strategy.
Keywords: Chapter 11 Bankruptcy, Random Assignment of Judges, Hedge Funds, Unsecured Creditors
JEL Classification: G23, G33, G34, K22
Suggested Citation: Suggested Citation