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Firms’ innovative activities can be sensitive to public policies that affect the availability of capital. In this paper, we investigate the effects of regional and temporal variation in U.S. personal bankruptcy laws on firms’ innovative activities. We find that bankruptcy laws that provide stronger debtor protection decrease the number of patents produced by small firms. Stronger debtor protection also decreases the average quality, and variance in quality, of firms’ patents. We find evidence that the negative effect of stronger debtor protection on experimentation and innovation may be due to the decreased availability of external financing in response to stronger debtor rights, an effect amplified in industries with a high dependence on external financing. Hence, while it is typically assumed that stronger debtor protection encourages innovation by reducing the cost of failure for innovators, we show that it can instead dampen innovative activities by tightening the availability of external financing to innovative firms. This paper was accepted by David Hsu, entrepreneurship and innovation .

How does cooperation emerge in a condition of international anarchy? Michael Tomz sheds new light on this fundamental question through a study of international debt across three centuries. Tomz develops a reputational theory of cooperation between sovereign governments and foreign investors. He explains how governments acquire reputations in the eyes of investors, and argues that concerns about reputation sustain international lending and repayment. Tomz's theory generates novel predictions about the dynamics of cooperation: how investors treat first-time borrowers, how access to credit evolves as debtors become more seasoned, and how countries ascend and descend the reputational ladder by acting contrary to investors' expectations. Tomz systematically tests his theory and the leading alternatives across three centuries of financial history. His remarkable data, gathered from archives in nine countries, cover all sovereign borrowers. He deftly combines statistical methods, case studies, and content analysis to scrutinize theories from as many angles as possible. Tomz finds strong support for his reputational theory while challenging prevailing views about sovereign debt. His pathbreaking study shows that, across the centuries, reputations have guided lending and repayment in consistent ways. Moreover, Tomz uncovers surprisingly little evidence of punitive enforcement strategies. Creditors have not compelled borrowers to repay by threatening military retaliation, imposing trade sanctions, or colluding to deprive defaulters of future loans. He concludes by highlighting the implications of his reputational logic for areas beyond sovereign debt, further advancing our understanding of the puzzle of cooperation under anarchy.

A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer—known as the Creditors’ Bargain Theory—identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors’ nonbankruptcy entitlements. This Article challenges the Creditors’ Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution. In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place guardrails that give the parties room to bargain while keeping them from engaging in extreme forms of hold up. While this framework is not based on any hypothetical ex ante bargain and gives no special deference to nonbankruptcy entitlements, it is the fundamental attribute of Chapter 11.

This Article presents the legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings (ICOs). We characterize the ICO as an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and (obviously) the IPO. We also take the form seriously as an example of technological innovation, in which promoters are beginning to effectuate their promises to investors through computer code, rather than traditional contract. To understand the dynamics of this shift, we first collect contracts, “whitepapers,” and other disclosures for the fifty top-grossing ICOs of 2017. We then analyze how the software code controlling the projects’ ICOs reflected (or failed to reflect) their disclosures. Our inquiry reveals that many ICOs failed even to promise that they would protect investors against insider self-dealing. Fewer still manifested such promises in code. Surprisingly, in a community known for espousing a technolibertarian belief in the power of “trustless trust” built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures. These findings offer valuable lessons to legal scholars, economists, and policymakers about the roles played by gatekeepers, the value of regulation, and the possibilities for socially valuable private ordering in a relatively anonymous, decentralized environment.

Lo scritto si propone di ricostruire in via sistematica i rapporti tra gli effetti soggettivi dell'esdebitazione del debitore principale rispetto alla posizione dei coobbligati in solido e dei fideiussori. La complessita della tematica discende dall'inferenza tra le regole dell'esdebitazione e l'operare del meccanismo dell'obbligo solidale, da un lato, e il principio dell'accessorieta fideiussoria, dall'altro lato. Particolare attenzione viene data, poi, alla qualificazione giuridica del diritto di regresso spettante ai coobbligati in solido e ai garanti che siano stati escussi dal creditore procedente.

Consumer bankruptcy is one of the largest social insurance programs in the United States, but little is known about its impact on debtors. We use 500,000 bankruptcy filings matched to administrative tax and foreclosure data to estimate the impact of Chapter 13 bankruptcy protection on subsequent outcomes. Exploiting the random assignment of bankruptcy filings to judges, we find that Chapter 13 protection increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, and decreases five-year foreclosure rates by 19.1 percentage points. These results come primarily from the deterioration of outcomes among dismissed filers, not gains by granted filers.

We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in cross-sections of other major asset markets.

Using an exhaustive data set on claims held by trade creditors (suppliers) on failed trade debtors (customers), we quantify the importance of trade credit chains for the propagation of corporate bankruptcy. We show that trade creditors experience significant trade credit losses due to trade debtor failures and that creditors' bankruptcy risks increase in the size of incurred losses. By exploring the roles of financial constraints and creditor-debtor dependences, we infer that the trade credit failure propagation mechanism is driven by both credit losses and demand shrinkage. Finally, we show that the documented propagation mechanism constitutes a significant part of the overall bankruptcy frequency, suggesting that it has measurable implications for the aggregate level.

In this Essay, we explore the question of how to assess the independence of debtor's counsel in Chapter 11. The question has arisen in recent high-profile bankruptcy cases, attracting renewed attention from commentators. We examine these cases and revisit the unique role that debtor's counsel serves. From this analysis, a few guiding principles emerge for determining independence and managing conflicts that may arise. First, consistent with the rules outside of bankruptcy, sophisticated parties are capable of waiving conflicts and should be free to do so when their interests alone are affected by the conflict. Second, the possibility of conflicts-both real and apparent-is much higher for debtor's counsel than for attorneys in other roles. This creates a challenge for courts, which must address both the real conflicts and the weaponization of apparent conflicts to shiftleverage. Conscious of this, courts should rely, whenever possible, on intermediate remedies-such as conflicts counsel and ethical firewalls-to address allegations that debtor's counsel is not independent. Finally, one should be careful to separate the analysis of the independence of a debtor's managers (including its directors and officers) from that of its counsel. With this framework in mind, notwithstanding several criticisms from commentators, most of the outcomes in recent cases are easy to explain and reconcile.

Standing trustees provide a critical function of fairness in chapter 13 bankruptcy, but a jurisdictional split regarding their fees means that trustees in multiple circuits are not paid for a large percentage of their work. Under Ninth and Tenth Circuit precedents, standing trustees may not collect the percentage fee when the debtor's case is dismissed before confirmation. This creates a different result for standing trustees as opposed to single-case trustees, hurts debtors and creditors, creates adverse incentives, and even constitutional conundrums. Permitting some debtors to enjoy the benefits of chapter 13 without paying their fair share creates a system where standing trustees must work on their cases, potentially for extended periods of time. Further, trustees risk going uncompensated if the debtor decides he wants to leave chapter 13 or refuses to propose a viable plan for confirmation. When these debtors do not pay the trustee fee, the trustee must find another source to fund her office operations. Thus, trustees resort to increasing their percentage fee to compensate for these losses, meaning other debtors must pay more to use chapter 13 and unsecured creditors get a lower payout. The Ninth and Tenth Circuit approaches further create nonsensical incentives where debtors are motivated to draw out the confirmation process as long as possible with no intention of confirming their plan to avoid paying the trustee fee. It also creates an incentive for trustees to confirm plans regardless of their feasibility, working counter to their role as a keeper of fairness in chapter 13. Additionally, by only awarding trustees their fees in the event of confirmation, a constitutional issue arises due to the trustee's role as a quasijudicial officer. This Comment untangles the various approaches courts have taken in awarding trustee fees in the event of pre-confirmation dismissals and delves into the harmful consequences of the Ninth and Tenth Circuit precedents. This Comment argues that standing trustee compensation in chapter 13 should not be denied merely because a debtor's proposed plan does not pass confirmation muster. Such an approach creates absurd and undesirable outcomes across the board in the chapter 13 system. Rather, courts should endorse the approach of other bankruptcy and district courts that allow for payment of standing chapter 13 trustee fee awards regardless of plan confirmation status. Even better, Congress should settle the issue by crafting a simple amendment to the Bankruptcy Code that resolves this issue entirely.