Asset Allocation in Bankruptcy

Abstract

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. The results highlight the importance of local search frictions and financial frictions in affecting the allocation of assets in bankruptcy.