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  5. Corporate Finance: Bankruptcy and Distress
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Corporate Finance: Bankruptcy and Distress

Paper Session

Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Maurepas
Hosted By: American Finance Association
  • Chair: Kristoph Kleiner, Indiana University

Are Judges Randomly Assigned to Chapter 11 Bankruptcies? Not According to Hedge Funds

Niklas Hüther
,
Indiana University
Kristoph Kleiner
,
Indiana University

Abstract

The random assignment of judges to court cases promotes fairness, minimizes forum shopping, and is routinely exploited for causal identification by economists. Analyzing U.S. corporate bankruptcy filings between 2010 and 2020, we provide the first evidence that assignment is not random, but predicted by the lending decisions of hedge funds. In our setting, judges can decide whether to convert a Chapter 11 bankruptcy to a Chapter 7 liquidation; while secured creditors have a preference for liquidation, unsecured creditors generally recover more under reorganization. Exploiting this distinction, we show that relative to secured hedge funds, unsecured hedge fund creditors are significantly less likely to be assigned a judge with a tendency to convert Chapter 11 cases. Effects are largest when the hedge fund has connections with the debtor's board or invested recently. Explaining these findings, we show judges are not assigned multiple large cases within a small time window, allowing hedge funds to influence the filing date and ultimately judicial assignment.

Virtual Competition and Cost of Capital: Evidence from Telehealth

Kimberly Cornaggia
,
Pennsylvania State University
Xuelin Li
,
University of South Carolina
Zihan Ye
,
University of Nevada-Las Vegas

Abstract

We exploit the staggered implementation of telehealth parity laws to provide causal evidence that virtual competition adversely affects rural U.S. hospitals' financing costs. Using pre-pandemic data, we find that the competition from urban hospitals adopting telehealth services negatively affects rural hospitals' credit ratings, offer yields, and trade prices in the municipal bond market. We identify the channel for these negative effects with hospital financial reports and medical claim data: telehealth services redistribute revenues from rural to urban hospitals, which decrease rural hospital profitability and increase financial distress. Overall, we conclude that virtual competition creates financial distress for rural hospitals.

Crisis Interventions in Corporate Insolvency

Samuel Antill
,
Harvard Business School
Christopher Clayton
,
Yale University

Abstract

We model the optimal resolution of insolvent firms in general equilibrium. Privately optimizing agents choose to let banks assign liquidations, encouraging ex-ante lending. A social planner optimally intervenes during a crisis because of two pecuniary externalities. A fire-sale externality motivates subsidies for liquidation-preventing loans to insolvent firms. However, a loan-price externality arises when constrained banks allocate scarce capital to averting liquidations rather than bolstering healthier firms, motivating liquidation subsidies. Efficient intervention can thus encourage or discourage liquidation, depending on the crisis, shedding light on recent crisis-motivated policy proposals. Interventions in seniority structures can substitute for interventions in liquidation decisions.

Efficiency or Resiliency? Corporate Choice between Financial and Operational Hedging

Viral V. Acharya
,
New York University, CEPR, and NBER
Heitor Almeida
,
University of Illinois
Yakov Amihud
,
New York University
Ping Liu
,
Purdue University

Abstract

We propose and model that firms face two potential defaults: Financial default on their debt obligations and operational default such as a failure to deliver on obligations to customers. Hence, firms with limitations on outside financing substitute between saving cash for financial hedging to mitigate financial default risk, and spending on operational hedging to mitigate operational default risk. Whereas financial hedging increases in financial leverage, operational hedging declines in leverage. This results in a positive relationship between operational spread (markup) of the firm and its financial leverage or credit risk, which is stronger for firms facing financing constraints. We present empirical evidence supporting the relationship by employing two proxies for operational hedging, viz., inventory and supply chain diversification, exploiting recessions and the global financial crisis as exogenous correlated shocks to operational and credit risks.

Discussant(s)
Tom Chang
,
University of Southern California
Katharina Lewellen
,
Dartmouth College
Dean Corbae
,
University of Wisconsin
Winston Dou
,
University of Pennsylvania
JEL Classifications
  • G3 - Corporate Finance and Governance