Review of Financial Studies Vol. 37 No. 12 2024
Are Bankruptcy Professional Fees Excessively High?
Abstract
Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are substantial. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I test this empirically. I study trustees, the most important professionals in chapter 7, who liquidate assets in exchange for legally mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. I show that a policy change lowering trustee fees would harm trustee incentives, reducing liquidation values. Nonetheless, such a policy would dramatically improve creditor recovery, increasing small-business-lender recovery by 15.7%.
- DOI
- 10.1093/rfs/hhae057
- Volume
- 37
- Issue
- 12
- Pages
- 3595-3647
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref