| BLES – March 14Business Law and Economics SymposiumTuesday 14 March 2017 — 14:45-17:00Room A009 — Law School — University of Amsterdam(Oudemanhuispoort 4-6, Amsterdam) Bankruptcy Related Contracting and Bankruptcy FunctionsAlan Schwartz A Theory of Corporate Personhood: Commitment of Capital, Liquidity, and the Separation between Ownership and ControlGiuseppe Dari-Mattiacci The Business Law and Economics Symposium (BLES) is organized by an Association of Business Law and Economics Professors from the University of Amsterdam, Erasmus University Rotterdam and Tilburg University. This is the second BLES meeting.Please register for this event by sending an e-mail before Monday, 6 March, to: [email protected] Related Contracting and Bankruptcy Functions Alan SchwartzSterling Professor of Law and Professor of Management, Yale UniversityCurrently in the country as a visiting scholar of the European Master in Law and Economics at Rotterdam A bankruptcy system is believed necessary to solve a coordination problem among the creditors of a distressed firm. The firm should survive if its going concern value exceeds its liquidation value, but each creditor, who is assumed to hold debt that is small in relation to the total, has too little at stake to coordinate a restructuring, and so pursues its individual collection remedies. In the likely equilibrium, all firms are liquidated, whether they are viable or not. Bankruptcy law restricts the ability of creditors and the debtor to contract about bankruptcy procedures in order to preserve the viability of a law that solves the coordination problem. These restrictions are broader than the assumed need for them requires. More importantly, there seldom is a coordination problem. The standard story assumes that the typical capital structure has equity and a set of symmetric small creditors, whose dispersion and stake are such that private restructurings are impossible. To the contrary, both theory and data show that common capital structures concentrate creditors for the purpose and with the usual result that viable debtors are privately restructured and unviable debtors are privately liquidated. Consistent with these outcomes, a very small percene of insolvencies eventuate in proceedings under the bankruptcy code. Theory and data thus raise two related, and largely novel, questions: Empirically, are the debtors that use the bankruptcy code, or the circumstances of those debtors, systematically different from the debtors and circumstances that obtain when the code is not used? Normatively, if there is no coordination problem, what problems should a bankruptcy law solve? This Essay introduces these questions but does not attempt to answer them, though it speculates briefly about the normative query. Rather, the Essay’s central claim is that bankruptcy scholarship should expand to consider what functions it is necessary for a corporate bankruptcy system to perform in light of the capital structures that actually exist. A Theory of Corporate Personhood: Commitment of Capital, Liquidity, and the Separation between Ownership and Control Giuseppe Dari-MattiacciProfessor of Law & Economics, University of Amsterdam I develop a theory of corporate personhood starting from a fundamental question: Who should own firm assets, the collection of investors or a distinct legal entity, which is in turn owned by the investors? In a partnership, individual investors own firm assets as they have the right to unilaterally withdraw their capital at will. If, instead, firm assets are owned by a distinct legal entity (the corporation), investors implicitly waive this right, locking capital in the firm. Capital lock-in facilitates long-term investments and enhances the liquidity of the secondary market for shares. Hence, liquidity-strapped investors can sell their shares and the firm survives individual liquidity shocks. Dispersed ownership, however, comes at the cost of a more entrenched management and inefficient continuation decisions. While partnerships are at times inefficiently liquidated due to their vulnerability to liquidity shocks, corporation live inefficiently long. The amount of own capital needed to start a business is lower and share value at issuance is higher in a corporation if the number of investors is large, while the partnership might be preferred with few investors. The analysis sheds light on the choice between different business organizations, practices and rules that foster dispersed ownership, insider trading, and the separation between ownership and control in large corporations. |
