Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy, with Shai Bernstein, Emanuele Colonnelli, and Mitch Hoffman, May 2023.
Abstract: In an RCT with US small businesses, we document that a large share of firms are not well-informed about bankruptcy. Many assume that bankruptcy necessarily entails the death of a business and do not know about Chapter 11, where debts are renegotiated so that the business can continue operating. Firms also exhibit bankruptcy-related stigma, believing that bankruptcy is embarrassing, a sign of failure, and a negative signal to employees and customers. Short educational videos that address information or stigma increase knowledge and decrease stigma, both immediately and durably over 4 months. Videos increase reported interest in using Chapter 11 bankruptcy and increase intended debt and investment. However, we do not observe long-term real effects. A survey of bankruptcy attorneys and judges points to entrepreneurs’ overconfidence and, to a lesser extent, excessive perceived legal fees as first-order frictions explaining the limited real impact of treatments that only address information and stigma.
Video links: [Control Video] [Information Video] [Information+Stigma Video]
Explaining Racial Disparities in Personal Bankruptcy Outcomes, with Bronson Argyle, Sasha Indarte, and Christopher Palmer, July 2023.
Abstract: We document substantial racial disparities in consumer bankruptcy outcomes and investigate the role of racial bias in contributing to these disparities. Using data on the near universe of US bankruptcy cases and deep-learning imputed measures of race, we show that Black filers are 21 and 3 percentage points (pp) more likely to have their bankruptcy cases dismissed without any debt relief in Chapters 13 and 7, respectively. We uncover strong evidence of racial homophily in Chapter 13: Black filers are 10 pp more likely to be dismissed when randomly assigned to a White bankruptcy trustee. To interpret our findings, we develop a general decision model and new identification results relating homophily to bias. Using this framework and our homophily estimate, we conclude that at least 40% of the 21 pp dismissal gap is due to either taste-based or inaccurate statistical racial discrimination.
Personal Bankruptcy and the Accumulation of Shadow Debt, with Bronson Argyle, Taylor Nadauld, and Christopher Palmer, December 2021.
Abstract: Before filing for bankruptcy, many households incur debt not reported to credit bureaus through the nonpayment of goods and services. Such “shadow debt” is an important liquidity source for distressed debtors; using new liability-level data, we estimate 44% of unsecured debt reported at bankruptcy is shadow debt. We use wage garnishment rules to isolate shocks to the benefits of bankruptcy filing and test for a particular reliance on shadow debt immediately before bankruptcy. We find that a $100 decrease in monthly wage garnishing results in an increase in shadow debt of $6,000 and an extra month delay in bankruptcy filing.
Trade Creditors' Information Advantage, with Victoria Ivashina, January 2018.
Abstract: Using information on the sales of debt claims for 132 U.S. Chapter 11 bankruptcy cases, we show that large trade creditors’ decisions to sell receivables of a distressed company in bankruptcy are predictive of lower recovery rates, and that in such cases these creditors sell ahead of less informed suppliers and other creditors. This result is especially pronounced for more opaque distressed firms, when trade creditors’ information advantage is likely largest. This evidence shows that suppliers that extend significant amounts of trade credit hold private information about their trade partners. Trade creditors who are geographically closer or in similar industries tend to lend the most, suggesting that these are two channels through which suppliers hold an information advantage.
Financial Costs of Judicial Inexperience, with Josh Madsen, Wei Wang, and Qiping Xu, Journal of Financial and Quantitative Analysis 58, No. 3 (May 2023): 1111-1143.
Can Gambling Increase Savings? Empircal Evidence on Prize-linked Savings Accounts, with Shawn Cole and Peter Tufano, Management Science 68, No. 5 (May 2022): 3282-3308.
Sizing Up Corporate Restructuring in the COVID Crisis, with Robin Greenwood and David Thesmar, Brookings Papers on Economic Activity, Fall 2020 (Special Edition): 391-428.
Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic, with Jared Ellias and Mark Roe, 11 Harvard Business Law Review (Online Issue) 1 (2021).
Bankruptcy Spillovers, with Shai Bernstein, Emanuele Colonnelli, and Xavier Giroud, Journal of Financial Economics 133, No. 3 (September 2019): 608-633.
Asset Allocation in Bankruptcy, with Shai Bernstein and Emanuele Colonnelli, Journal of Finance 74, No. 1 (February 2019): 5-53 (Lead Article).
Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts, Management Science 64, Issue 11 (November 2018): 4967-5460.
The Ownership and Trading of Debt Claims in Chapter 11 Restructurings, with Victoria Ivashina and David Smith, Journal of Financial Economics 119, Issue 2 (February 2016): 316-335.
Subprime Foreclosures and the 2005 Bankruptcy Reform, with Donald Morgan and Matthew Botsch, Federal Reserve Bank of New York Economic Policy Review 18, No. 1 (March 2012): 47-57.
- Winner of Jensen Prize for Best Paper in Corporate Finance and Organizations (Second Prize)