Asset Allocation in Bankruptcy
119 Pages Posted: 11 Oct 2015 Last revised: 10 Jun 2018
Date Written: April 26, 2018
This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that the long-run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users, and in areas with low access to finance. These findings suggest that when search frictions are large, liquidation can lead to inefficient allocation of assets in bankruptcy.
Keywords: capital allocation, bankruptcy, liquidation, fire sales
JEL Classification: G33, K22, E22, E44
Suggested Citation: Suggested Citation