Michael Simkovic

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Essay
Volume 92.1
Bankruptcy's Turn to Market Value
Mark J. Roe
Professor of Law, Harvard Law School.

Thanks for comments and conversations on the topic go to Barry Adler, Scott Altman, Ken Ayotte, Jordan Barry, Lucian Bebchuk, Emiliano Catan, Jared Ellias, Allan Ferrell, Jesse Fried, Stuart Gilson, Jeffrey Haas, Jonathan Hirschfeld, Edith Hotchkiss, Ted Janger, Ed Morrison, Kristin Mugford, Michael Ohlrogge, Paul Oudin, Robert Rasmussen, Roberto Tallarita, George Triantis, Sophie Vermeille, Andrew Verstein, and participants in the American Law & Economics Association 2023 and the USC–Lewis & Clark March 2023 conferences, the Boston-area bankruptcy seminar group, and a Harvard Law School workshop. Excellent extended research assistance came from Trace Dodge, Bobby Farnham, Nicholas Juan, Claudia Luyt, Nikki Ovaisi, Domenic Reyes, Priyal Thakral, Yusuke Tsuzuki, and Amanda White.

Michael Simkovic
Professor of Law, University of Southern California Law School.

Thanks for comments and conversations on the topic go to Barry Adler, Scott Altman, Ken Ayotte, Jordan Barry, Lucian Bebchuk, Emiliano Catan, Jared Ellias, Allan Ferrell, Jesse Fried, Stuart Gilson, Jeffrey Haas, Jonathan Hirschfeld, Edith Hotchkiss, Ted Janger, Ed Morrison, Kristin Mugford, Michael Ohlrogge, Paul Oudin, Robert Rasmussen, Roberto Tallarita, George Triantis, Sophie Vermeille, Andrew Verstein, and participants in the American Law & Economics Association 2023 and the USC–Lewis & Clark March 2023 conferences, the Boston-area bankruptcy seminar group, and a Harvard Law School workshop. Excellent extended research assistance came from Trace Dodge, Bobby Farnham, Nicholas Juan, Claudia Luyt, Nikki Ovaisi, Domenic Reyes, Priyal Thakral, Yusuke Tsuzuki, and Amanda White.

Chapter 11 was widely viewed as a failure in the first decade of the Bankruptcy Code’s operation, the 1980s. While basic bankruptcy still has its critics and few would say it works perfectly, the contrast with bankruptcy today is stark: bankruptcies that took years in the 1980s take months in the 2020s.

Multiple changes explain bankruptcy’s success and we do not challenge their relevance. But in our analysis, one major change is missing from the current understanding of bankruptcy’s success: bankruptcy courts and practice in the 1980s rejected market value; today bankruptcy courts and practice accept and use market value. This shift is a major explanation for bankruptcy’s success.

We argue that valuation improvements explain much of the increased speed and efficiency of Chapter 11 practice over the decades. We provide evidence that valuation conflicts narrowed and that the corporate reorganization process accelerated. The switch to market thinking across the bankruptcy spectrum—in bankruptcy transactions, in judging, and in lawyering—goes far in explaining why.