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A ground-based ultra-wideband radiometer operating at 540, 900, 1380, and 1740 MHz was used to measure microwave thermal emissions from an Arctic sea ice floe as part of the Multidisciplinary drifting Observatory for the Study of Arctic Climate (MOSAiC) Expedition. The instrument was deployed on a drifting ice floe near 86°N, 120°E in leg 1 of the expedition (December 2019) and observed second-year ice (potentially with refrozen melt ponds) that experienced new ice growth at its base over a ten-day period. Measured circularly polarized brightness temperatures were compared with the predictions of a radiative transfer (RT) model for a layered medium consisting of ocean, growing new ice, desalinated remnant second-year ice/refrozen melt pond, and snow layers. Characteristics of the sea ice composition used in the model were determined from in-situ measurements. Comparisons of the measured and modeled wideband brightness temperatures showed good agreement consistently over the observation period and for various off-nadir observation angles. The results demonstrate the capabilities of 0.5-2 GHz microwave radiometry for observing sea ice properties and also show the impact of a saline ice layer at the ice bottom on the measured brightness temperature.

In the post-financial crisis period, many corporate bankruptcies involve complicated, fragmented capital structures characterized by many layers of debt and complex legal entity structures with many subsidiaries. Why do capital structures evolve this way, given that they make distress more costly to resolve? I suggest an answer based on the notion that investors may disagree about the value of assets that back loans. When such disagreement exists, firms have the incentive to exploit it by issuing claims that are targeted to subsets of the assets that investors are more optimistic about. This capital structure fragmentation can minimize the borrower's cost of funds ex-ante by maximizing creditors' perceived recoveries, but it can be socially inefficient, because it creates costly valuation disputes in bankruptcy. I show that disagreement about collateral values can cause inefficient liquidations. I also find that reorganizations, in which pre-bankruptcy creditors receive securities in the ongoing firm, allows parties to continue "agreeing to disagree" about the value of their entitlements. This can promote settlement and reduce costly litigation over valuation, relative to selling the firm as a going concern for cash.

Subsidiary legal entities can be used to create a path around bankruptcy's automatic stay, giving a secured creditor a free right to withdraw collateral. In some cases, core assets of the firm are made separable from each other. To fully understand the desirability of subsidiaries as a path around the stay, I take a step backward and ask a fundamental question that has not been addressed formally: why do we need a mandatory stay of secured creditors in the first place? The model generates conditions under which a stay of secured creditors can be valuable. Three conditions are necessary: a) the collateral must be firm-specific, b) debt contracts are sequential and incomplete, and c) bargaining at bankruptcy is imperfect. Under these conditions, a debtor may grant withdrawal rights even when they are less efficient than a stay. I discuss ways that a stay might be made applicable to subsidiary creditors in a way that is targeted at the inefficiencies the model identifies.

Placing innovative assets in a separate subsidiary creates more autonomy for the unit manager of the innovation than a division, even when the subsidiary is wholly owned and controlled by the parent. The key driver is limited liability: unlike a division, the parent has the option to walk away from the subsidiary’s debt obligations. As a result, the parent invests less in developing internal uses for the innovation. This causes the unit manager to invest more in developing independent uses for the innovation: he must ”sink or swim” on his own effort, and his desired actions are less subject to overrule.

The lenders that fund Chapter 11 reorganizations exert significant influence over the bankruptcy process through the contract associated with the debtor-in-possession (“DIP”) loan. In this Article, we study a large sample of DIP loan contracts and document a trend: over the past three decades, DIP lenders have steadily increased their contractual control of Chapter 11. In fact, today’s DIP loan agreements routinely go so far as to dictate the very outcome of the restructuring process. When managers sell control over the bankruptcy case to a subset of the creditors in exchange for compensation, we call this transaction a “bankruptcy process sale.” We model two situations where process sales raise bankruptcy policy concerns: (1) when a senior creditor leverages the debtor’s need for financing to lock in a preferred outcome at the outset of the case (“plan protection”); and (2) when a senior creditor steers the case to protect its claim against litigation (“entitlement protection”). We show that both scenarios can lead to bankruptcy outcomes that fail to maximize the value of the firm for creditors as a whole. We study a new dataset that uses the text of 1.5 million court documents to identify creditor conflict over process sales, and our analysis offers evidence consistent with the predictions of the model.

This article offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and other bilateral (“executory”) contracts in bankruptcy, with an emphasis on commercial real estate leases. Section 365, which governs these contracts, allows debtors to choose whether to keep (“assume”), abandon (“reject”), or transfer (“assign”) their contracts, with time limits provided by the Bankruptcy Code. The main goal of the article is to analyze a controversial change to the Code in 2005 (BAPCPA) that shortens the time to expiration of a debtor's option to reject, requiring tenant-debtors to make decisions on their real estate leases within seven months unless a landlord grants an extension. I find that the seven-month limit strongly accelerated real estate lease disposition decisions, suggesting that bankruptcy bargaining is far from a frictionless, Coasean world. Further, I find that BAPCPA is associated with a significantly lower probability of reorganization for the most lease-intensive firms. I also test a simple theory of real options, and I find that debtors do not behave as the simple theory suggests. In particular, many executory contracts are assumed before expiration. I present suggestive evidence of implicit contracting motives: debtors often assume early in order to secure performance from their counterparties that cannot be guaranteed by the contract alone.

In this paper, we develop a theory that explains why firms are so commonly organized as legal entities that are formally distinct from their owners. A legal entity permits an owner to create a firm as a bundle of contracts that can be transferred to someone else, but only if they are transferred together. This bundled assignability allows for a balancing of several potentially conflicting interests. First, the owner who assembles the contracts wants liquidity – that is, the ability to transfer the contracts and cash out. Second, the firm's contractual counterparties want protection from opportunistic transfers that will reduce the value of the performance they have been promised. And third, the owner wants long-term commitments from the firm's counterparties to protect the value of her investments in the bundle. Because transfers of equity interests in a legal entity will generally not be considered assignments of the entity's contracts, entities reduce the contracting costs of creating bundled assignability. We find that owners will prefer bundled assignability when investments in the bundle are alienable from the owner; but when investments are specific to the owner, contracts that prohibit changes of control are optimal.

In this paper we propose a theory of optimal property rights in a financial contracting setting. Following recent contributions in the property law literature, we emphasize the distinction between contractual rights, that are only enforceable against the parties themselves, and property rights, that are also enforeceable against third parties outside the contract. Our analysis starts with the following question: which contractual agreements should the law allow parties to enforce as property rights? Our proposed answer to this question is shaped by the overall objective of minimizing due diligence (reading) costs and investment distortions that follow from the inability of third-party lenders to costlessly observe pre-existing rights in a borrower's property. Borrowers cannot reduce these costs without the law's help, due to an inability to commit to protecting third-parties from redistribution. We find that the law should take a more restrictive approach to enforcing rights against third-parties when these rights are i) more costly for third-parties to discover, ii) more likely to redistribute value from third-parties, and iii) less likely to increase efficiency. We find that these qualitative principles are often reflected in observed legal rules, including the enforceability of negative covenants; fraudulent conveyance; corporate veil-piercing; and limits on assignability.

This paper focuses on a key property of asset-backed securities (ABS); namely, that ABS are designed to achieve "bankruptcy remoteness"of the securitized assets from the borrowing …rm. This provides lenders with maximal protection from dilution that is not available with other contracts, such as secured debt. ABS can have real eects in allowing …rms to commit to more e¢ cient investment decisions in bankruptcy. We show that securitization of replaceable assets (such as receivables) prevents ine¢ cient continuation in bankruptcy, but securitization of necessary assets can lead to ine¢ cient liquidations. In these circumstances, secured debt and/or leases can be preferred. Our model also predicts that greater legal risk of "bankruptcy remoteness"being undermined by courts leads to lower overall e¢ ciency and higher interest rates for ABS investors. We test this second prediction using a controversial decision in the Chap- ter 11 bankruptcy of LTV Steel, in which a securitization contract was unexpectedly treated as a secured loan. Using a dierence-in-dierences approach, we …nd that ABS spreads for securitizers eligible for Chapter 11 increased signi…cantly more than spreads for insured bank securitizers, who are not Chapter 11-eligible, in the period fol- lowing the LTV …ling. The results demonstrate that the creditor protection provided by "bankruptcy remoteness"is indeed valuable and priced in …nancial markets.

This article provides a framework for analyzing side agreements in corporate bankruptcy, such as intercreditor and “bad boy” agreements. These agreements are controversial because they commonly include a promise by one party to remain silent – to waive some procedural right they would otherwise have under the Bankruptcy Code – at potentially crucial points in the reorganization process. Using simplified examples, we show that side agreements create benefits in some instances, but parties to a side agreement may have incentive to contract for specific performance or excessive stipulated damages that impose negative externalities on non-parties to the agreement. A promise not to extend new financing, for example, can affect the debtor’s reorganization prospects to the detriment of non-party creditors.We develop a simple proposal that honors the intent of the parties to the side agreement and preserves the efficiency benefits they create, while limiting negative externalities. If a side agreement is unlikely to cause externalities, a court should enforce the agreement according to its terms. But if there is a nontrivial potential for value-destroying externalities, the court should limit a nonbreaching party’s remedy to its expectation damages. Our proposal is superior to the current approach in the case law, which focuses on tougher contract interpretation standards instead of limitations on remedies.We also use our model to derive an answer to the increasingly vexing questions of whether intercreditor agreement disputes should be resolved by the bankruptcy court or outside bankruptcy, and whether forum selection clauses should be enforced. If the non-breaching party asks for expectation damages, the bankruptcy court has no particular expertise and should defer to forum selection clauses. Where specific performance or stipulated damages are at issue, by contrast, our model suggests that the dispute should be resolved exclusively in bankruptcy proceedings.

Many firms have filed for bankruptcy to manage mass tort liabilities, most notably asbestos producers. We model a bankruptcy procedure that optimally balances the liquidity needs of present claimants and an uncertain number of future claimants. We find that future claimants should receive greater awards in expectation than present claimants as compensation for bearing greater future claims risk. We also find that allocating more value to contractual creditors in bankruptcy makes an earlier filing more likely, which may increase overall welfare. Optimal risk-sharing implies that creditors should receive equity in a trust fund, with tort claimants receiving senior debtlike securities.

Two persistent questions of enterprise law are raised and addressed: First, how does law matter to business practice? Second, how can we make law that stimulates economic efficiency? These questions are difficult to answer because of two important complementarities: the complementarity between areas of law within a country’s legal regime and the complementarity between law and other social environments such as markets and social norms. Over the course of the two-day conference, academics and practitioners from the U.S. and Japan in the areas of corporate law, securities regulation, labor law (including both employment protection law and labor union law), bankruptcy law, and tax law investigate the ways that enterprise law affects practice complementarily with markets and social norms. A key analytical framework is introduced, in which the business enterprise is viewed as an incentive mechanism among the four indispensable capital providers of the firm: management, employees, shareholders, and creditors. Only through close attention to the incentive bargain between these four players can optimal legislative design and economic efficiency be achieved.

This paper offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and other bilateral (“executory”) contracts in bankruptcy, with an emphasis on commercial real estate leases. Section 365 of the Bankruptcy Code, which governs these contracts, provides debtors with a rich set of strategic options that can be analyzed from a real options framework. The debtor can choose to keep (“assume”), abandon (“reject”), or transfer (“assign”) their contracts, with time limits provided by the Bankruptcy Code. I analyze the effect of a change to the Code in 2005 (BAPCPA) that shortens the time to expiration of a debtor’s option to reject, requiring tenant-debtors to make decisions on their real estate leases within seven months unless a landlord grants an extension.This paper offers several new findings. The distribution of leases and executory contracts across firms is highly skewed; for debtors at the tails, leases are quite important. At the 90th percentile, leases comprise 46.4% of the firm’s assets and over 70% of its financial liabilities. The main use of assignment in bankruptcy is to facilitate sales, rather than restructurings: over 90% of contract assignments occur in the context of sales of business units or the whole firm. I find that the seven month limit strongly accelerated real estate lease disposition decisions, suggesting that bankruptcy bargaining is far from a frictionless, Coasean world. Further, I find that BAPCPA is associated with a significantly lower probability of reorganization for the most lease-intensive firms.While debtors’ behavior is in some ways consistent with a simple real options theory, I find important deviations. In particular, some executory contracts are assumed before expiration. I present suggestive evidence of implicit contracting motives: debtors often assume early in order to secure performance from their counterparties that cannot be guaranteed by the contract alone.

This chapter, for the Oxford Handbook of Corporate Governance, provides a survey of law, economics, and finance scholarship at the intersection of corporate governance and financial distress. In financial distress, both inside and outside of bankruptcy court, formal and informal control rights are paramount. Thus, we organize our review around the major constituencies that exercise control rights in distressed firms: shareholders, managers and boards; senior and junior creditors; and the law, courts and judges. Broadly, our review suggests that an understanding of the incentives of these constituencies is crucial to explaining outcomes. Our review also documents the paradigm shift in the bankruptcy literature, away from the “safe haven” view of Chapter 11 as a slow, manager and shareholder-controlled reorganization process. Chapter 11 case outcomes are increasingly steered by sophisticated activist investors, generating faster resolutions that are more creditor-controlled. We suggest some directions for future research in light of these developments.

In this paper, we argue that the notion of equity as a safety valve on the law can be seen as part of the law’s response to the problem of opportunism. We define equity as the use of a more flexible, morally judgmental, and subjective mode of legal decision making that roughly corresponds with historical equity. We distinguish opportunists as agents who have unusual willingness and ability to take advantage of necessary imperfections in the law. We present a simple contracting model that captures the role of equity as a safety valve, and show how it can solve problems posed by opportunists. In our model, a simple but imperfect formal legal regime is able to achieve first best in the absence of opportunists. But when opportunists are added, a more flexible regime (equity) – specifically, one that denies damages to parties who exploit contractual gaps – can be preferred. However, equity is also vulnerable to being used opportunistically by the parties it intends to protect. For this reason, we show that it is often preferable to limit equity, reserving it for use only against those who appear sufficiently likely to be opportunists. Our model generates intuitive comparative statics that describe the optimal expansiveness or restrictiveness of equity.

Contents: Introduction Henry E. Smith 1. Property Rights, Land Settlement and Land Conflict on Frontiers: Evidence from Australia, Brazil and the US Lee J. Alston, Edwyna Harris and Bernardo Mueller 2. Commons, Anticommons, Semicommons Lee Anne Fennell 3. The Anticommons Lexicon Michael A. Heller 4. Private Property and Public Rights Thomas W. Merrill 5. Toward an Economic Theory of Property in Information Henry E. Smith 6. Unilateral Relinquishment of Property Lior Jacob Strahilevitz 7. Standardization in Property Law Henry E. Smith 8. Covenant Lite Lending, Liquidity, and Standardization of Financial Contracts Kenneth Ayotte and Patrick Bolton 9. The Personification and Property of Legal Entities George Triantis 10. Bankruptcy as Property Law Barry E. Adler 11. The Law and Economics of Marital Property Martin Zelder 12. Property Titling and Conveyancing Benito Arrunada 13. Land Demarcation Systems Gary D. Libecap and Dean Lueck 14. Servitudes Carol M. Rose 15. The Economics of Nuisance Law Keith N. Hylton 16. Acquiring Land Through Eminent Domain: Justifications, Limitations, and Alternatives Daniel B. Kelly 17. The Rest of Michelman 1967 William A. Fischel Index

An influential theory in the management literature (Christensen, 1997) argues that incumbent firms have difficulty commercializing innovations that are not initially useful to its existing customers, and recommends creating separate, autonomous units for the innovation. This paper explains why subsidiary entities, even when wholly-owned and formally controlled by their corporate parent, can assist in this process. I show that placing the innovation in a subsidiary creates more autonomy for the unit manager of the innovation than if the same project were held as a division inside the parent entity. The key difference between subsidiaries and divisions in my model is limited liability: unlike a division, the parent has the option to walk away from the subsidiary's obligations. Because of this implicit "put option", the parent invests less in developing internal uses for the innovation. This causes the unit manager to invest more in developing independent uses for the innovation, for two reasons. First, less investment by the parent means the unit manager must "sink or swim" on the product of his own effort. Second, less parent involvement means that the unit manager's desired actions are less subject to overrule. This increases the unit manager's initiative, as in Aghion and Tirole (1987).

The usual reaction if one mentions bankruptcy as a mechanism for addressing a financial institution's default is incredulity. Those who favor the rescue of troubled financial institutions, and even those who prefer that their assets be promptly sold to a healthier institution, treat bankruptcy as anathema. Everyone seems to agree that nothing good can come from bankruptcy. Indeed, the Chapter 11 filing by Lehman Brothers has been singled out by many as the primary cause of the severe economic and financial contraction that followed, and proof that bankruptcy is disorderly and ineffective. As a result, ad hoc rescue lending to avoid bankruptcy has been the preferred solution. In this Article, we seek to provide the first careful assessment of the belief that governmental rescues are preferable to bankruptcy. While the interaction of financial firms, systemic risk, and Chapter 11 is complex, our analysis suggests that the widespread belief that bankruptcy should not be used to resolve the distress of financial firms is misguided, and that it has had serious costs in the recent crisis. Although bankruptcy is not always the optimal response to financial distress, it is more effective than is generally realized. In Parts I and II of the Article, we describe the principal problems created by financial distress - debt overhang and creditor runs - and the mechanisms bankruptcy provides for addressing these problems. We then provide historical context in Part III, looking to Drexel Burnham's bankruptcy in 1990 for further lessons about the efficacy of bankruptcy. In Part IV, we turn to firm-specific bailouts, describing this strategy's benefits and the distortions it causes. We then shift our focus back to bankruptcy, considering the (legitimate) concern that it may not adequately counteract systemic risk in Part V, and exploring its treatment of derivatives, one of the chief new habitats of systemic risk, in Part VI. Part VII is a brief conclusion.

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors gain leverage through objections and other court motions. We also find that bargaining between secured and unsecured creditors can distort the reorganization process. A Chapter 11 case is significantly more likely to result in a sale if secured lenders are oversecured, consistent with a secured creditor-driven fire-sale bias. A sale is much less likely when these lenders are undersecured or when the firm has no secured debt at all. Our results suggest that the advent of creditor control has not eliminated the fundamental inefficiency of the bankruptcy process: resource allocation questions (whether to sell or reorganize a firm) are ultimately confounded with distributional questions (how much each creditor will receive) due to conflict among creditor classes.

This article considers bankruptcy law design in a setting that is appropriate for entrepreneurial firms. These firms are characterized by a dependence on an owner-manager who is essential to the firm and must be given incentive through an ownership stake to maximize the value of the project. In a relationship-lending environment, the banks that fund entrepreneurs cannot capture the gains from providing the entrepreneur with this stake, and this leaves the entrepreneur emerging from bankruptcy with a larger debt burden than is socially efficient. In this setting, a “fresh-start” bankruptcy policy provides greater debt relief than the bank would approve voluntarily, and this generates greater social surplus. The results suggest the value of separate procedures for small business bankruptcies that allow some mandatory debt relief to preserve ex post incentives.

We analyze a sample of large Chapter 11 cases to determine which factors motivate the choice of filing in one court over another when a choice is available. We focus in particular on the Delaware court, which became the most popular venue for large corporations in the 1990s. We find no evidence to suggest that Delaware's popularity was driven by managers or equity holders seeking a procedure friendly to their interests. Instead, debt structure differences, specifically, the fraction of assets financed with secured debt, and court characteristics, particularly a court's level of experience, are the most important factors driving the choice of venue. While Delaware does not appear significantly different with respect to deviations from absolute priority in favor of equity or likelihood of producing reorganizations, it does differ along the dimension of speed. Controlling for other factors, we find that a Delaware reorganization is between 140 and 190 days faster than an equivalent case in another court. Given that speed benefits secured creditors most, we conclude that Delaware's popularity in the 1990s was unlikely to have resulted from a pro-debtor bias combined with a manager or equity holder preference for Delaware.

We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the ability of judges, and the quality of contract enforcement. We analyze a model in which a judicially-influenced bankruptcy process can enhance the efficiency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on firm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment, and show that the optimal degree of "creditor-friendliness" in the bankruptcy code increases as judicial ability to recognize firm quality falls and as the quality of contract enforcement deteriorates. Our model contributes to the existing bankruptcy law design literature in demonstrating that a "debtor-friendly" law that focuses on preserving going-concern value, such as U.S. Chapter 11, requires judicial expertise to be effective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. Our model is also able to explain cross-country patterns in the content and usage of bankruptcy laws around the world as reported in existing empirical research.

Leading scholars in the field of law and economics contribute their original theoretical and empirical research to this major Handbook. Each chapter analyzes the basic architecture and important features of the institutions of property law from an economic point of view, while also providing an introduction to the issues and literature.

We analyze a sample of large Chapter 11 cases to determine which factors motivate the choice of filing in one court over another when a choice is available. We focus in particular on the Delaware court, which became the most popular venue for large corporations in the 1990s. We find no evidence of agency problems governing the venue choice or affecting the outcome of the bankruptcy process. Instead, firm characteristics and court characteristics, particularly a court's level of experience, are the most important factors. We find that court experience manifests itself in both a greater ability to reorganize marginal firms and in reorganizing such firms faster. Delaware is similar to other high-experience courts in terms of the likelihood of reorganization controlling for firm characteristics, but is a standout in terms of speed. We estimate that a Delaware bankruptcy requires approximately 40% less time to complete than an equivalent case in another court.