A Normative Theory of Business Bankruptcy

Abstract

This Article will view bankruptcy through the lens of a single theory. Scholars, especially those of an economic bent, are coming to agree that a business bankruptcy law should function to reduce the cost of capital for firms. There appear to be few papers, however, that evaluate the basic structure of a modern bankruptcy code by a cost of capital yardstick alone. This is due in part to disagreement about whether a bankruptcy law should pursue goals in addition to capital cost reduction. The novelty of this Article will lie in its single-minded application to bankruptcy of the cost of capital metric and in its argument that only this metric should matter. The Article will focus on U.S. law for convenience. Its conclusion will hold that a bankruptcy law committed exclusively to capital cost reduction would be considerably smaller and less centralized than the law we now have.