Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics

Abstract

In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.

Duty calls: prediction of failure in reorganization processes

“…In this particular case, the financial independent variables for the construction of the "ad hoc" model were extracted from a compendium of accounting and financial variables identified in previous studies as potential predictors of insolvency and bankruptcy (Abinzano et al, 2021), using univariate analysis and multicollinearity tests to establish the selection criteria. Financial variables are commonly used both for bankruptcy prediction and as control variables to explain the results of reorganization proceedings (Stef and Bissieux, 2022;Corbae and D'Erasmo, 2021). The following five variables, based on the criteria used by Abinzano et al (2021), were selected: (Current Assets -Inventories)/Current Assets ((CA-I)/CA); Cash/Current Assets (C/CA); Cash/Total Assets (C/TA); Total Liabilities/Total Assets (TL/TA) and Net Income/Total Assets (NI/TA).…”

Evaluation of the effectiveness of anti-crisis management of municipal unitary enterprises of the housing and communal sector in the territory of the Sverdlovsk region

“…Недостаточное проявление оздоровительного характера процедур банкротства находит своё отражение в работах зарубежных авторов. Причинами таких недостатков могут являться как несовершенная методология управления, так и законодательные особенности, в частности Симмонс [5], а также Корба и Дэрасмо [6] указывают на законодательные противоречия законодательстве США, которые побуждают вводить процедуры банкротства исключительно для последующей ликвидации предприятия.…”

“…Рассмотрим ещё одну известную четырёхфакторную модель, созданную в 1972 году, модель Лиса [23] (6). Значение указывающее на вероятность банкротства компании находится в диапазоне ниже 0.037 [24]: Z = 0,063*K1 + 0,092*K2 + 0,057*K3 + 0,001*K4, Методы прогнозирования, рассмотренные выше, находят своё применение в различных сферах и отраслях экономики.…”

How to Use Microdata for Macro-Finance

“…In a related paper,Corbae & D'Erasmo (2021) build a model of firm dynamics with financial frictions to ask how the US bankruptcy system-in particular, the option to use Chapter 7 liquidation and Chapter 11 reorganization-affects long-run productivity. Instead of assuming an exogenous collateral constraint,Corbae & D'Erasmo (2021) explicitly model the bankruptcy process whereby lenders will recoup either the scrap value of the firm's assets (Chapter 7) or a share of the current debt value (Chapter 11). They estimate financial frictions by matching bankruptcy outcomes (e.g., recovery rates) or leverage for firms in both Chapter 7 and Chapter 11.…”