This article studies how the allocation of control rights in bankruptcy influences outcomes. Using Hungarian data, we find that the large majority of bankrupt firms in our sample are maintained as going concerns despite the fact that these firms generate large operating losses and low recovery rates for pre-bankruptcy creditors. We trace the bias to the allocation of control rights between secured and unsecured creditors and the compensation scheme of the agent managing the bankruptcy process. Our findings shed light on a very important bankruptcy design question: how particular provisions of the bankruptcy code affect the costs of bankruptcy and the size of the pie available to pre-bankruptcy creditors.

Twentieth century Japan provides a remarkable laboratory for examining how an externally imposed institutional and regulatory intervention affects the ownership of corporations. In the first half of the century, Japan had weak legal protection but strong institutional arrangements. The institutions were dismantled after the war and replaced by a strong form of legal protection. This inversion resulted in a switch from Japan being a country in which equity markets flourished and ownership was dispersed in the first half of the century to one in which banks and companies dominated with interlocking shareholdings in the second half of the century.