Sizing Up Corporate Restructuring in the COVID Crisis, with Robin Greenwood and David Thesmar, Brookings Papers on Economic Activity (forthcoming).
Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic, with Jared Ellias and Mark Roe, 11 Harvard Business Law Review (Online Issue) 1 (2021).
Bankruptcy Spillovers, with Shai Bernstein, Emanuele Colonnelli, and Xavier Giroud, Journal of Financial Economics 133, No. 3 (September 2019): 608-633.
Asset Allocation in Bankruptcy, with Shai Bernstein and Emanuele Colonnelli, Journal of Finance 74, No. 1 (February 2019): 5-53 (Lead Article).
Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts, Management Science 64, Issue 11 (November 2018): 4967-5460.
The Ownership and Trading of Debt Claims in Chapter 11 Restructurings, with Victoria Ivashina and David Smith, Journal of Financial Economics 119, Issue 2 (February 2016): 316-335.
Subprime Foreclosures and the 2005 Bankruptcy Reform, with Donald Morgan and Matthew Botsch, Federal Reserve Bank of New York Economic Policy Review 18, No. 1 (March 2012): 47-57.
- Winner of Jensen Prize for Best Paper in Corporate Finance and Organizations (Second Prize)
Running up the Tab: Personal Bankruptcy, Moral Hazard, and Shadow Debt, with Bronson Argyle, Taylor Nadauld, and Christopher Palmer, August 2020.
Abstract: Like other forms of insurance, bankruptcy laws provide borrowers ex-ante risk protection but can lead to moral hazard from excessive borrowing and risk taking. While bankruptcy reforms are often explicitly intended to prevent debtors from “abusing the system,” there is currently no empirical evidence on whether bankruptcy filers increase their indebtedness in anticipation of filing. Using newly collected data on the balance sheets of personal bankruptcy filers, we develop an identification strategy to test for moral hazard in debt accumulation by bankruptcy filers and demonstrate theoretically how this could reduce aggregate welfare. We find that debtors who are incentivized by policy changes to delay filing for bankruptcy incur significantly more unsecured debt before filing, as predicted by our model of borrowers with private information about their impending bankruptcy. A significant share of the additional debt incurred by later filers is “shadow debt” — debt from the non-payment of goods and services that is not reported to credit bureaus.
Bankruptcy and the COVID-19 Crisis, with Jialan Wang, Jeyul Yang, and Raymond Kluender, September 2020.
Abstract: We examine the impact of the COVID-19 economic crisis on business and consumer bankruptcies in the United States using real-time data on the universe of filings. Historically, bankruptcies have closely tracked the business cycle and contemporaneous unemployment rates. However, this relationship has reversed during the COVID-19 crisis thus far. While aggregate filing rates were very similar to 2019 levels prior to the severe onset of the pandemic, filings by consumers and small businesses dropped dramatically starting in mid-March, contrary to media reports and many experts' expectations. The total number of bankruptcy filings is down by 27 percent year-over-year between January and August. Consumer and business Chapter 7 filings rebounded moderately starting in mid-April and stabilized around 20 percent below 2019 levels, but Chapter 13 filings remained at 55-65 percent below 2019 levels through the end of August. In contrast to the 2007-9 recession, states with a larger increase in unemployment between April and July experienced greater drops in bankruptcies. Although they make up a small share of overall bankruptcies, Chapter 11 filings by large corporations have increased since 2019, and are up nearly 200 percent year-over-year from January through August. These patterns suggest that the financial experiences of consumers, small businesses, and large corporations have diverged during the COVID-19 crisis. Large businesses have continued to seek and receive relief from the bankruptcy system as they would during a normal recession, and relatively wealthy homeowners have on average benefited from the fiscal stimulus and housing moratoria mandated by the CARES Act and other policies. However, non-homeowners and small businesses may face financial, physical, and technological barriers to accessing the bankruptcy system, especially in the areas hardest-hit by unemployment.
Financial Costs of Judicial Inexperience, with Josh Madsen, Wei Wang, and Qiping Xu, April 2020.
Abstract: Exploiting the random assignment of corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite bankruptcy judges' significant prior legal experience, formal education, and rigorous hiring process, cases assigned to new judges spend more time in bankruptcy, realize lower creditor recovery rates, and lower return on assets post bankruptcy, but similar refiling rates. Judges' learning curve for the average filing is one year but rises to four years for the most complex cases. Exposure to more corporate cases and a greater diversity of businesses accelerates judges' learning. Overall, the results are consistent with lower-quality restructuring by less experienced judges. Conservative estimates suggest that slight policy adjustments to the case assignment process could, in aggregate, reduce legal fees and increase creditor recoveries by approximately $10 billion for our sample period.
Trade Creditors' Information Advantage, with Victoria Ivashina, January 2018.
Abstract: Using information on the sales of debt claims for 132 U.S. Chapter 11 bankruptcy cases, we show that large trade creditors’ decisions to sell receivables of a distressed company in bankruptcy are predictive of lower recovery rates, and that in such cases these creditors sell ahead of less informed suppliers and other creditors. This result is especially pronounced for more opaque distressed firms, when trade creditors’ information advantage is likely largest. This evidence shows that suppliers that extend significant amounts of trade credit hold private information about their trade partners. Trade creditors who are geographically closer or in similar industries tend to lend the most, suggesting that these are two channels through which suppliers hold an information advantage.
Can Gambling Increase Savings? Empircal Evidence on Prize-linked Savings Accounts, with Shawn Cole and Peter Tufano, June 2018.
Abstract: This paper studies the adoption and impact of prize-linked savings (PLS) accounts, which offer lottery-like payouts to individual account holders in lieu of interest. Using micro-level data from a bank in South Africa, we show that PLS is attractive to a broad group of individuals, with financially-constrained individuals and those with no other deposit accounts particularly likely to participate. Individuals who choose to use PLS increase their total savings on average by 1% of annual income. Exploiting the random assignment of prizes, we present causal evidence that PLS substitutes for lottery gambling, but is a complement to standard savings.