Publication Date
Financial Markets Group Discussion Papers DP 956
The canonical view of bankruptcy law is that it solves a market failure by imposing a collective choice process that supplants the market. We propose that bankruptcy law instead catalyzes the market if that process provides scope for rent seeking. Considering collective action problems as the central friction, as in the canonical theory, we argue that such a law induces activist investing that improves the efficiency of distressed restructuring. This expands the purview of bankruptcy law from a focus on bargaining issues to an active role in regulating corporate control contestability. We interpret the evolution of Chapter 11 and the surrounding market environment through this lens.
