Efficient Bankruptcy, Bargaining Power, and AI Innovation

Abstract

Using a large exogenous increase in bankruptcy court capacity in a triple-differences framework, I show that higher bankruptcy efficiency increases existing creditors' willingness to accept out-of-court debt restructurings proposed by moderately distressed firms. Firms' threat to file for bankruptcy becomes more credible with less congested courts, so the appeal of out-of-court restructuring is higher when bankruptcy is more efficient. Out-of-court restructurings do not respond to bankruptcy efficiency when the firm's CEO owns more than one percent of the firm's equity, likely because the bargaining power of these firms is impeded by their CEOs' high personal cost of bankruptcy. Exposure to the bankruptcy efficiency shock causes moderately distressed firms to hire more AI workers and produce more AI-related patents. These results suggest that a shift of bargaining power from creditors to debtors ameliorates two frictions: it reduces the overuse of costly bankruptcy (over out-of-court restructuring) and alleviates the underinvestment in broadly useful innovations.

Keywords: Restructuring, Bargaining power, Artificial Intelligence, Innovation, Bankruptcy

JEL Classification: G31, G32, G33, O30, O32