Creditor committee composition in bankruptcy court : an empirical study



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Creditor committees have been characterized as the “watchdogs” of the bankruptcy reorganization process of large companies. Not only do creditor committees have broad statutory powers to oversee the debtor and its management, but they also play a key role in preventing abuses by professionals and other participants in the often complex corporate bankruptcy process. Furthermore, recent research has provided evidence of abusive fee practices in large corporate bankruptcy cases which point to failures in the oversight mechanisms of the process. This dissertation examines the role of creditor committees in the bankruptcy process and in selected outcomes of this process, with a focus on fees paid to bankruptcy professionals. Based on a unique data set comprised of 1,037 bankruptcy cases over the period 1999-2008, the research first examines committee characteristics along three separate dimensions of analysis: individual characteristics of members serving on committees; changes of committee composition over the life of the committees; and social characteristics of committee interlocks. The Calpine bankruptcy case is used throughout this dissertation to illustrate the research. This research finds a dense network of interlocks that dominates large cases, with financial industry members being significantly more likely to serve on multiple committees than non-financial industry members. Analysis of the data shows that over 50% of creditor committees are never amended and there are no systematic recompositions of the remaining committees. A test of small-world topology in the member creditor committee network fails to show a strong small-world structure in the member social network once it is corrected for imposed network topology. This dissertation then employs econometric models to evaluate whether creditor committee variables help explain professional fees in large bankruptcy cases. It finds a statistically significant and positive relationship between the social centrality measure of the creditor committee case and the professional fees paid. This finding points to potential conflicts of interest among the repeat creditor committee players and their constituents. The research fails to find a significant relationship between the presence of financial firms in creditors’ committees and professional fees paid in the case. The dissertation concludes with policy recommendations and suggestions for further research.