Law School, Becker Friedman Institute Collaborate for Conference
Professors from the University of Chicago Law School and Chicago Booth collaborated last month for a “Conference on Creditors and Corporate Governance” at the Law School, co-sponsored by the Becker Friedman Institute for Research in Economics and the Institute for Law and Economics. The idea to bring scholars together to study these issues was born when Law Professor Douglas Baird and Amir Sufi, Professor of Finance at Booth, realized they were working on the same topic, the degree of control that creditors exercise over a corporation.
Historically, the scholarship in corporate finance has focused on the control that shareholders exert over a corporation and its leadership. Baird, Sufi, and now others have found that the oft-ignored creditors actually wield a much greater measure of control than previously thought, especially when the firm is in distress. This shift has many real-world consequences for corporate reorganizations and leadership issues.
“If you really want to understand how the law works, you have to understand the rights not only of equity holders but also of creditors,” Baird said.
Baird said the idea for the conference, held Sept. 14 and 15, was, “Why don’t we bring in other people from other places who think about these issues? It brought theorectical and empirical people together.” Baird is Harry A. Bigelow Distinguished Service Professor of Law.
Anthony Casey, Assistant Professor of Law, who co-hosted the event with Baird and Sufi, said the “main value is getting both sides’ perspectives.” As an example, he said, finance scholars have done empirical work on the ways creditors exert their rights over corporate governance, while legal scholars think about how courts see corporate governance from a creditor’s perspective versus a shareholder’s. And of course, those are just two of many questions both sides are asking.
“Getting both those people in the room, you really get a synthesis you wouldn’t otherwise get,” Casey said. “Neither finance nor the law is happening in a vaccum.”
For example, several papers looked at what happens to a corporation when it gets into financial trouble. Sometimes creditors threaten to call their loans unless they can renegotiate for more control of the firm. Sufi found that when that happens, the control is often effective; that is, the company avoids bankruptcy. This can lead to a new CEO or business plan, underscoring the high amount of influence creditors possess.
Baird and Casey, in their paper “No Exit? Withdrawal Rights and the Law of Corporate Reorganizations,” examined how corporations tend to split their assets into different legal entities, thereby allowing some investors to opt out of bankruptcy if the firm encounters distress. This allows investors to create a tailored bankruptcy regime. Those are, of course, just two of many examples of the ideas presented, which is why the small group of scholars was eager to attend. The number of participants was kept to about two dozen to facilitate serious discussion among those who are intensely interested in this subject.
Wei Jiang, a Professor in the Columbia University Graduate School of Business, said she came to the conference because it featured “a collection of high-quality finance and legal scholars” and very interesting papers close to her research field. She also appreciated having legal scholars review her work, rather than just finance scholars, she said.
David C. Smith, an Associate Professor of Banking and Commerce at the McIntire School of Commerce at the University of Virginia, said he was thrilled to mix with the top scholars in creditor-related corporate governance.
“To bring together such a strong group in one room for two days to exchange research ideas, well, it was just a great experience for me,” he said. “I was giddy the whole time. I hope that Douglas, Amir, and Tony decide to do this again next year.”
It’s possible, Baird said. He expects further collaboration with finance scholars at Booth and beyond. For now, the participants of this year’s conference have a lot of new ideas and contacts in the field. The papers presented at the conference:
- Bankruptcy Law as a Liquidity Provider – Kenneth M. Ayotte, Northwestern University School of Law, and David A. Skeel, University of Pennsylvania Law School
- Dynamic Risk Management –Sufi, of Chicago Booth, and Adriano Rampini and S. Viswanathan, both Fuqua School of Business, Duke University
- Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis – Frederick Tung, Boston University School of Law, and Xue Wang, Fisher College of Business at Ohio State University
- The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Product Market Concentration –Jiang, of Columbia; Alon Brav, Fuqua School of Business at Duke; and Hyunseob Kim, Johnson Graduate School of Management at Cornell University
- Private Equity and the Resolution of Financial Distress – Per Strömberg, Stockholm School of Economics; Edith Hotchkiss, Carroll School of Management at Boston College; and Smith of the University of Virginia
- The Ownership and Trading of Debt Claims in Chapter 11 Restructurings – Smith, of the University of Virginia, and Benjamin Iverson and Victoria Ivashina, both of Harvard Business School
- Repossession and the Democratization of Credit – Efraim Benmelech, of the Harvard University Department of Economics, and Juliano J. Assunção and Fernando S.S. Silva, both of the Pontifical Catholic University of Rio de Janeiro
- The Impact of Creditor Control on Corporate Bond Pricing and Liquidity – Hotchkiss, of Boston College
- No Exit? Withdrawal Rights and the Law of Corporate Reorganizations – Baird and Casey