The Role Of Information Disclosure In Corporate Bankruptcy

The bankruptcy system plays an important role in resolving financial distress and reallocating resources in the economy. While many believe that transparency is central to an efficient bankruptcy system, the Bankruptcy Code lacks clear standards for disclosure and financial reporting. In this paper, I study the effects of information disclosure on bankruptcy outcomes by exploiting two sources of plausibly exogenous variation in disclosure during a bankruptcy: the random assignment of bankruptcy judges who may differ in interpreting the disclosure requirements of the law, and a significant change in regulation that increased disclosure by certain creditors but not others. I find evidence that disclosure can both improve asset allocation choices and facilitate more efficient bargaining between creditors. I also highlight two frictions—compliance costs and proprietary costs—that may inhibit transparency and make mandatory disclosure undesirable. My findings provide some of the first evidence on the role of information disclosure in corporate bankruptcy, and I discuss their implications for policy and for the broader corporate disclosure literature.