Corporate bankruptcy law favors reorganization over liquidation. In adopting Chapter 11 of the Bankruptcy Code, Congress presumed that liquidations destroy valuable corporate assets and impose substantial costs on the constituents of the firm. To avoid these costs, Congress made reorganization more attractive, affording managers of financially troubled companies considerable latitude in their treatment of creditors and in the reorganization of the firm. In this Article, the authors offer a dramatically different theoretical and empirical analysis of Chapter 11. The authors argue that Chapter 11 should be repealed because it fails to provide corporate managers with appropriate incentives to allocate corporate resources optimally. The authors show that corporate managers are using bankruptcy reorganization far more frequently, and for less distressed firms, than previously. The authors then show that both bondholders and stockholders lose significantly greater wealth under Chapter 11 than before. If, then, neither bondholders nor stockholders have benefited under Chapter 11, the authors ask, who has? The authors suggest that the principal beneficiaries, in addition to legions of lawyers, accountants, and financial advisers, have been corporate managers; in a sense, Chapter 11 has served as a kind of "management defensive measure" against corporate debtholders. As a result, the authors argue, Chapter 11 should be replaced by a "market-based" alternative, which they propose in closing.
