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72 Wash. U. L. Q. 873 (1994)
Discussion of Improving Bankruptcy Procedure by Philippe Aghion, Oliver Hart, and John Moore

handle is hein.journals/walq72 and id is 885 raw text is: DISCUSSION OF IMPROVING BANKRUPTCY PROCEDURE BY PHILIPPE AGHION, OLIVER HART, AND JOHN MOORE PHILIP H. DYBVIG* By bringing together a wide range of bankruptcy scholars and practition- ers, this Conference has made very clear the broad extent of opinions about current bankruptcy law. One extreme view suggests bankruptcy is a mysterious and wonderful process that has many benefits that are difficult or impossible to quantify or enumerate. A polar extreme view, presented in the paper I am discussing by Aghion, Hart, and Moore (AHM),' is that bankruptcy is a complicated and costly solution to a very simple problem.2 I suspect the truth (or at least the most useful view of the world) lies between the two extremes. It certainly should be possible to quantify and enumerate the functions of the bankruptcy process, and the resulting demystification should be an input to improved policy decisions. On the other side, the existing proposed simple alternatives to bankruptcy, such as that of AHM, neglect important functions of bankruptcy. The AHM paper in particular weakens its own case by neglecting existing institutions. Perhaps because of our shared economic training, I am predisposed to be sympathetic with the central motivation of AHM. For example, I have a casual perception that Chapter 11 works poorly for large firms. Based on what I know about large publicized bankruptcies, the bankruptcy process is unnecessarily slow, arbitrary, manipulable, and destructive of prior contracting. Unfortunately, the hard evidence I am aware of neither confirms nor refutes my perception To the extent that my perception is * Boatmen's Bancshares Professor of Banking and Finance, Olin School of Business, Washington University in Saint Louis. 1. Philippe Aghion et al., Improving Bankruptcy Procedure, 72 WASH. U. L.Q. 849 (1994). 2. The paper I am discussing is a slightly different exposition of the plan proposed in Philippe Aghion et al., The Economics of Bankruptcy, Reform, 8 J.L. ECON. & ORGANIZATION 523 (1992). 3. For example, the analysis of Professor Bowers, see James W. Bowers, Rehabilitation, Redistribution or Dissipation: The Evidence for Choosing Among Bankruptcy Hypotheses, 72 WASH. U. L.Q. 955 (1994), is clearly flawed because a large fall in stock price on announcement of bankruptcy would be expected due to the bad news about firm fundamentals implicit in the announcement. This price reduction would occur whether the bankruptcy process is value-neutral, value-destroying, or somewhat value-enhancing. Accordingly, the fall in stock price is no evidence at all concerning the value impact of bankruptcy. Adverse selection on later sale is conditioned on information available at

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