Judge specific differences in Chapter 11 and firm outcomes, Working paper

This paper uses case information on Chapter 11 filings for 7,824 private companies across 13 courts in the US between 1989 and 2006. We first establish that within district courts cases are assigned randomly between pro-debtor and pro-creditor judges, which allows us to estimate judge specific fixed effects in their Chapter 11 rulings. We find strong and economically significant differences across judges in the propensity to grant or deny specific motions. Specifically some judges rule consistently more favorably towards creditors (or debtors). Based on the judge fixed effects we created an aggregate score to measure the pro-debtor friendliness of judges. We show that pro-debtor judges have worse firm outcomes after Chapter 11: they see lower rates of firm survival and lower sales and employment growth. This result seems to be driven by an increased misalignment of incentives between managers and shareholders in distress and the ability of managers to extract private benefits from the firm.