Reorganization in Chapter 11
35 Pages Posted: 17 Oct 2002
Date Written: December 2002
Using a sample of 224 Chapter 11 filings reported from 1985-1994, we relate operating and financial characteristics to the decision to reorganize in Chapter 11 and to measures of success following reorganization. We find that reorganization success is related to firm profitability measured as of the year-end just prior to Chapter 11 filing and to firm and industry profitability measured as of the year-end just prior to bankruptcy resolution. In addition, reductions in liability ratio while in Chapter 11 are associated with reorganization success. These results suggest that valuable information about the ability of firms to successfully restructure is revealed during Chapter 11. We find that the decision to reorganize rather than sell firms is related to the amount of restructuring done while in Chapter 11, but is unrelated to either pre-filing or pre-resolution operating profitability. The fact that decision makers, on average, do not appear to utilize valuable information about operating profitability in determining whether firms are reorganized or sold is consistent with Chapter 11 being biased towards the continuation of firms as independent entities.
Note: Previously titled "Economic Viability and Chapter 11 Outcomes"
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