Justice Good as Random?

Abstract

The random assignment of judges/examiners to cases promotes fairness and is routinely exploited for causal identification across social sciences. Analyzing Chapter 11 bankruptcies, we find judicial assignment is not random, but predicted by hedge funds. In our setting, judges decide whether to convert bankruptcies to liquidation, reducing unsecured creditor recovery. Relative to secured hedge funds, cases involving unsecured hedge fund creditors (and hedge fund equity holders) are assigned judges with lower past conversion rates and higher unsecured creditor recovery rates. Effects are greatest when hedge funds are experienced, invested recently, or have connections with/control of the debtor. Extending the analysis, we find experienced legal council can similarly influence assignment. To explain our findings, we show judges are not assigned consecutive large cases, yet most bankruptcy lawyers are unaware of these dynamics; knowledgeable parties can then judge-shop by altering the exact date of filing. We demonstrate the need for control variables and bounded IV specifications when exploiting judge/examiner designs in the presence of sophisticated players.

Keywords: Chapter 11 Bankruptcy, Random Assignment of Judges, Hedge Funds

JEL Classification: G23, G33, G34, K22