In spite of the important role that judges play in the bankruptcy reorganisation process, little is known about the effects of their experience and personal attributes on case outcomes. Our recent paper, to the best of our knowledge, provides the first empirical study on the effects of bankruptcy judges’ time-varying judicial experience on reorganisation outcomes, using 1,310 Chapter 11 filings between 1980 and 2012 by U.S. public firms with at least $50 million in assets. Our comprehensive sample contains 309 unique bankruptcy judges, representing 75 bankruptcy courts, and is one of the largest samples among studies of large corporate bankruptcies.
In the U.S., bankruptcy judges are randomly assigned to cases filed in their bankruptcy court. This important aspect of the bankruptcy process allows us to determine how judicial experience affects case outcomes. For example, if more complex cases were only assigned to more experienced judges, it would be impossible to tell whether experience affects case outcomes, because we would not observe less-experienced judges with complex cases. However, random assignment means we can determine the causal effect of judge experience on bankruptcy outcomes, similar to randomised medical trials testing the efficacy of a new treatment.
In the first part of this paper, we provide evidence that the likelihood a judge is assigned a large case is unrelated to the judge's past experience or existing caseload. In addition, we find weak relationships between firm characteristics such as book assets, financial leverage, operating performance, industry, and the number of business entities filing for Chapter 11 and the judicial experience of the assigned judge. These two pieces of evidence are consistent with the random assignment of large Chapter 11 filings.
Exploiting this random assignment, in the second part of this paper, we examine the causal effect of judges' on-the-bench experience on three major bankruptcy outcomes. We find that cases assigned to judges with twice as much time on the bench realise a 5.5% decrease in time spent in reorganisation, a decline of nearly one month relative to the average duration of bankruptcies in our sample. This reduced time translates into savings of approximately $2 million in legal fees alone for the average case in our sample. Similarly, a one-standard-deviation increase in the judge's time on the bench leads to a 3% increase in the probability that the firm emerges from bankruptcy. Importantly, we find that cases assigned to more experienced judges do not have higher bankruptcy refiling rates. The combined evidence suggests that cases assigned to experienced judges move through the reorganisation process faster and more firms are preserved as going-concerns, without higher recidivism.
We perform further analysis to better understand why judicial experience is so important. In particular, we find that experience has the largest effects on case duration and the likelihood of emergence when judges’ caseloads are high. Meanwhile, differences between experienced and inexperienced judges are less pronounced when caseloads are low. This evidence suggests that experienced judges are better able to handle heavy workloads, which further supports the notion that judges improve their judicial skills while serving on the bench.
When comparing the effects of judges’ on-the-bench experience to general experience (measured by educational background, years of prior work experience, and type of prior work) and personal attributes (measured by gender, political affiliation, and military service), we find little evidence that general experience and personal attributes consistently affect case outcomes. Importantly, our main findings are not changed after including these judge characteristics as additional control variables. Our results suggest that judges’ specific expertise developed through time on the job matters more than general skills developed through prior work experience and personal attributes in resolving large and complex Chapter 11 cases.
Benjamin Iverson is an Assistant Professor of Finance at the Marriott School of Business at Brigham Young University.
Joshua Madsen is an Assistant Professor of Accounting at the Carlson School of Management, University of Minnesota.
Wei Wang is an Associate Professor and RBC Fellow of Finance at the Smith School of Business, Queen’s University.
Qiping Xu is an Assistant Professor of Finance at the Mendoza College of Business, University of Notre Dame.