By Vidhan K. Goyal (Hong Kong University of Science and Technology), Joshua Madsen (Carlson School of Management, University of Minnesota), and Wei Wang (Smith School of Business, Queen’s University)
Does having a lawyer who has previously interacted with the judge matter for bankruptcy outcomes? While knowledge obtained through past interactions about the judge’s views and preferences could improve the efficiency of court process, lawyer familiarity with the judge could also result in a capture of economic rents, leading to delays due to the difficulties in measuring lawyer efforts. Furthermore, connected lawyers could also exploit their connections to obtain biased outcomes in favor of their clients.
We examine these questions in the context of corporate bankruptcies by assembling a comprehensive dataset that contains detailed biographical information, professional experiences, and past in-court interactions of 162 bankruptcy judges overseeing 650 large Chapter 11 cases from 1996–2013, and 2,426 unique lawyers from 775 law firms representing those cases as debtor’s counsel. Our results show that cases with a lead counsel lawyer connected to the judge spend 16–21% less time in bankruptcy, a 2.6–3.5-month reduction in bankruptcy duration, translating into aggregated savings of $3.2–4.5 billion in professional fees for our sample firms.
Our empirical strategy exploits a setting where lead counsel lawyers are selected by the firm before the bankruptcy is filed and thus the assignment of a judge, minimizing concerns that connected lawyers are endogenously hired. The results are robust to the inclusion of controls for case complexity, industry effects, lawyer’s expertise, law firm quality, and judges’ fixed characteristics. Our specifications therefore ensure that any effect from having a connected lawyer is not due to unobserved heterogeneity that is specific to courts, judges, or lawyers.
We further document that the most effective lead counsel connections arise through previous clerkships and in-court interactions with the judge assigned to the case. The effects concentrate in cases with smaller legal teams where connected lawyers presumably have more influence. Having a connected non-lead counsel lawyers’ or connected lawyer representing the unsecured creditors committee only weakly affects case duration.
Lastly, we investigate other bankruptcy outcomes, including the probability of emergence, the bankruptcy refiling rate, operating performance post emergence, the likelihood of a Chapter 7 conversion, and the likelihood of loss of exclusivity extension. We find no evidence that the faster restructurings come at a cost of higher refiling rates or poorer operating performance after emergence. More importantly, there is no evidence that connections lead to judge favoritism or pro-debtor biases.
How do connected lawyers accelerate the bankruptcy process? The most likely explanation is connected lawyers’ knowledge of a judge’s preferences. Judges are extremely busy, and must devote enormous effort to keep straight all the facts and legal nuance under consideration. Connected lawyers are plausibly more familiar with the assigned judge’s preferences and expectations as well as the cases, legal precedents, and statutes that the judge will rely on. They can exploit this knowledge to help the “light shine through.” Idiosyncrasies across judges and their preferences imply that lawyers’ experience with other judges may not be as useful as a connection to the assigned judge and that there is likely no one “magic bullet” used by all connected lawyers. That is, lawyers’ knowledge of judges’ preferences are largely non-transferrable. These findings have implications for the design of bankruptcy institutions, where institutions that lead to lawyers’ increased awareness of a judge’s preferences could produce efficiency gains.
The full article is available here.