An Evolutionary Theory of Corporate Law and Corporate Bankruptcy

Abstract

This article contends that the important recent literature exploring historical and political influences on American corporate law has neglected a crucial component of corporate governance: corporate bankruptcy. Only by appreciating the complementary relationship between corporate law and corporate bankruptcy can we understand how corporate governance operates in any given nation.

To show this, I contrast American corporate governance with Japan and Germany. America's market-driven corporate governance can only function effectively if the bankruptcy framework includes a manager-driven reorganization option. The relational shareholding that characterizes Japanese and German corporate governance, by contrast, requires a much harsher bankruptcy regime. Drawing on recent insights in corporate finance, I argue that a permanent change in the corporate governance approach (such as an increase in relational governance in the United States, as some commentators have advocated) would require a corresponding change in corporate bankruptcy, and vice versa.

In order to understand why American corporate governance differs so dramatically from Japan and Germany, I explore the evolution of corporate governance and corporate bankruptcy in the three countries in historical and political terms. Focusing in greatest detail on the United States, I provide a more complete account (including extensive research of primary sources) of the remarkable history of corporate reorganization in this country than any previous analysis; and demonstrate that market-driven corporate governance and corporate reorganization did, as my theory predicts, develop in complementary fashion.

My analysis of interest group activity, as well as structural and ideological factors, in the United States and in Japan and Germany suggests that corporate governance patterns will remain surprisingly stable in each of the three countries, despite the increasing internationalization of markets. This is not to say that one of the two systems is now and will continue to be superior to the other, however. The two approaches appear both to be generally efficient and to have characteristic biases.

JEL Classification: G33, G34, G38, K22