The Effect of Judicial Bias in Chapter 11 Reorganization

This paper uses case information on Chapter 11 filings for almost 5000 private companies across five district courts in the US between 1989 and 2004. We first establish that within districts cases are assigned randomly to judges, which allows us to estimate judge specific fixed effects in their Chapter 11 rulings. We find very strong and economically significant differences across judges in the propensity to grant or deny specific motions. Specifically some judges appear to rule persistently more favorably towards creditors or debtors. Based on the judge fixed effects we created an aggregate index to measure the pro-debtor (pro-creditor) friendliness of each judge. We show that a pro-debtor bias leads to increased rates of re-filing and firm shutdown as well as lower post-bankruptcy credit ratings and lower annual sales growth up to five years after the original bankruptcy filing. Finally we use the estimated judge fixed effects to instrument for the exogenous variation in the propensity to grant specific motion