DP5998 Are Russian Commercial Courts Biased? Evidence from a Natural Bankruptcy Experiment

Author(s): Ariane Lambert-Mogiliansky , Konstantin Sonin , Ekaterina Zhuravskaya

Publication Date: December 2006

Keyword(s): bankruptcy , capture , incentives , regional governments , Russia , transition

JEL(s): D23 , G33 , H11 , H77

Programme Areas: Development Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP5998.asp.asp

We study the nature of judicial bias in bankruptcy proceedings following the enactment of bankruptcy law in Russia in 1998. We find that regional political characteristics affected judicial decisions about the numbers and types of bankruptcy procedures initiated after the law took effect. In particular, controlling for indicators of firms’ insolvency and the quality of the regional judiciary, reorganization procedures were significantly more frequent in regions with politically popular governors and governors who had hostile relations with the federal government. Poor judicial quality was also associated with higher incidence of reorganizations. In addition, the quality of the regional judiciary affected performance of firms in reorganization procedure: in regions with poor judicial quality firms in reorganization significantly underperformed firms not in bankruptcy; while the opposite was true in regions with high-quality judges. The effect of judicial quality on restructuring is particularly strong in regions with politically popular governors because the judicial bias in governor’s favor is the highest in poor-quality courts when governors are popular. This evidence is consistent with previously reported anecdotes, which suggested that politically strong regional governors used bankruptcy proceedings to protect firms from paying federal taxes.