Available at: Available at SSRN: https://ssrn.com/abstract=5052176 or http://dx.doi.org/10.2139/ssrn.5052176
Summary:
Many non-Delaware firms strategically file for bankruptcy in Delaware. Should this "forum shopping" be allowed? This question has motivated six congressional bill proposals over decades of policy debate. Using a novel natural experiment and Census-Bureau microdata, we inform this debate. Comparing observably similar firms within a Delaware-adjacent state, we show that physical proximity to Delaware predicts forum shopping. Instrumenting with proximity, we find that forum shopping causally: (i) prevents closures and liquidations, (ii) shortens bankruptcies, (iii) boosts creditor recovery, and (iv) increases post-bankruptcy employment by 62%. Proximity to Delaware is uncorrelated with pre-bankruptcy employment trends, validating the exclusion restriction.
Commentary:
While admitting that this paper "is silent on the implications of forum shopping to courts other than Delaware", unrecognized are the disparate responses by courts, likely including in Delaware, to corporations that forum shop to find just the right case law or judge and when consumers have the temerity and gall to similarly file in a convenient but improper forum.
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