In a financial contracting model, we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes coexist—one class fully concentrated and with control rights upon default, the other dispersed and without control rights—removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, which refers to debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. Our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.

We study a demand-and-supply model of judicial discretion in corporate bankruptcy. On the supply side, we assume that bankruptcy courts may be biased for debtors or creditors, and subject to career concerns. On the demand side, we assume that debtors (and creditors) can engage in forum shopping at some cost. A key finding is that stronger creditor protection in reorganization improves judicial incentives to resolve financial distress efficiently, preventing a “race to the bottom” toward inefficient uses of judicial discretion. The comparative statics of our model shed light on a lot of evidence on U.S. bankruptcy and yield novel predictions on how bankruptcy codes should affect firm-level outcomes.

Can shareholder voting prevent managers from destroying value in corporate acquisitions? Previous studies based on U.S. data are inconclusive because shareholder approval is discretionary. We study the U.K. where approval is mandatory for deals exceeding a multivariate relative-size threshold. We find that in the U.K. shareholders gain 8 cents per dollar at announcement with mandatory voting, or $13.6 billion over 1992-2010 in aggregate; without voting, U.K. shareholders lost $3 billion. U.S. shareholders lost $214 billion in matched deals. Differences-in-differences and multidimensional regression discontinuity analyses support a causal interpretation. Our evidence suggests that mandatory voting imposes a binding constraint on acquirer CEOs.

We provide a systematic empirical assessment of the Minsky hypothesis that business fluctuations stem from irrational swings in expectations. Using predictable firm-level forecast errors, we build an aggregate index of irrational expectations and use it to provide three sets of results. First, we show that our index predicts aggregate credit cycles. Next, we show that these predictable credit cycles drive cycles in firm-level debt issuance and investment and similar cycles between financially constrained and unconstrained firms, as Minsky predicts. Finally, we show more pronounced cycles in firm-level financing and investment for firms with ex ante more optimistic expectations.