Abstract: A majority of small U.S. businesses attempting to reorganize in bankruptcy fail to successfully do so. Subchapter V of Chapter 11 was introduced in 2020 for firms with less than $7.5 million in total liabilities to streamline the process by reducing bankruptcy costs and negotiation frictions, and enabling entrepreneurs to retain their ownership. Employing regression-discontinuity and difference-in-differences designs, we show that many small businesses reorganize under the new procedures that otherwise would have been liquidated. Further, expected creditor recoveries are at least as high in Subchapter V as in similar small business reorganizations, and post-bankruptcy survival rates are no lower. Our results show that the increased ability to preserve small businesses is not associated with a bias toward continuing unviable firms, and that creditors are not harmed by a shift in bargaining power toward small business owners.
Discussant: Jean-Marie Meier, University of Pennsylvania
Abstract: Many countries' insolvency systems focus on restructuring financial liabilities, and ignore operational liabilities such as leases and long-term supplier contracts. We model insolvency procedures with and without operational restructuring options. Such options avoid excessive liquidation of firms with significant non-financial obligations. Ex-ante, this option should increase debt capacity, especially in industries with inputs supplied under executory contract. We test this hypothesis around the introduction of a new law in Israel which facilitated the rejection of contracts, and by comparing capital structures for industries with high lease obligations between the U.S. and other countries. Empirical results confirm that operating restructuring is a key aspect of insolvency.
Abstract: The shipping industry provides a unique laboratory for examining the limits of Coase for resolving financial distress since the industry is largely detached from sovereign bankruptcy procedures. We find that private contracts and institutions have evolved to resolve coordination failures: for example, we find a low incidence of vessel seizures, ports that compete to enforce creditor rights, and small fire sale discounts. However, we report significant spillovers of financial distress for other stakeholders, particularly environmental, who bear the costs of under maintained vessels, including oil spills, and abandonment of derelict ships, which end up in toxic breaker yards.
Discussant: Dong Beom Choi, Seoul National University
