Finance & Accounting Research Seminar - Mike Burkart (London School of Economics) “Bankruptcy Law and the Market for Corporate Influence”

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. Based on a model in which coordination failures are the central friction, as in the canonical theory, we argue that such a law induces activist investing which improves the efficiency of distressed restructuring. This expands the focus of bankruptcy from pure bargaining to control contestability. We interpret the evolution of Chapter 11 and its surrounding market environment through this lens.