Whither the Race? A Comment on the Effects of the Delawarization of Corporate Reorganizations

Abstract

Recent empirical work has demonstrated that large, publicly held firms tend to file for bankruptcy in Delaware. In our previous work, we have documented this trend, and argued that it may be efficient for prepackaged bankruptcies, while it unclear if it is efficient for traditional Chapter 11 cases. In this piece, we respond to LoPucki and Kalin's assertion that Delaware bankruptcy court performs worse than others. They base this claim on the observation that firms that file for bankruptcy in Delaware are more likely to file for bankruptcy a second time than are firms that file in another jurisdiction. We demonstrate a number of problems with their analysis. These include that: they have failed to offer a robust definition of what constitutes a successful reorganization; they do not adequately justify focusing narrowly on refiling rates; and that a substantial number of firms drop out of their sample which may adversely affect their results. Moreover, contrary to their assumption, we also show that there may be an optimal refiling rate that is above zero. In any given case, there may be a trade off between resolving the case quickly and the risk of a subsequent filing. We conclude that, while their results are provocative, there remains much more work to be done before strong implications can be drawn from them.