The Untenable Case for Chapter 11

Abstract

The premise of a business reorganization is that assets that are used for production in the industry for which they were designed are more valuable than those same assets sold for scrap."); 123 CONG. REC. H35,444 (daily ed. Oct. 27, 1977) (statement of Rep. Rodino) ("For businesses, the bill facilitates organization, protecting investments and jobs.");

Financial Distress as a Selection Mechanism: Evidence from the United States

“…In contrast, some of the literature on financial distress argues that survival is not sufficiently linked to economic performance and poor performers survive for far too long (e.g., Baird (1986), White (1989), Bradley and Rosenzweig (1992)). …”

“…In particular, it has been argued that Chapter 11 allows inefficient firms to survive or survive for too long (Baird (1986), White (1989), Bradley and Rosenzweig (1992), Hotchkiss (1995) To test the effect of performance and other factors on survival, we first will look at survival over the entire financial distress process. However, it might be that the determinants of survival depend on the survival horizon.…”

“…As a consequence of this view, several authors have suggested a reform of U.S. bankruptcy law that moves the reorganization law closer to a liquidation code (Aghion, Hart, and Moore (1992)) or even abolishes Chapter 11 altogether (Bradley and Rosenzweig (1992)). Our results have mixed and limited implications for this debate.…”

Governance in Financial Distress and Bankruptcy

“…Early discussion of the merits of the Chapter 11 system included criticism that the process was too protective of incumbent management, allowing them to retain 9 too much control and failing to punish managers for poor performance (Bradley and Rosenzweig, 1992).…”

Debt Restructuring with Multiple Creditors and the Role of Exchange Offers

“…Also, court intervention generates deadweight costs of its own, and it is not clear whether the party who makes the filing decision will make the socially efficient choice between liquidation and reorganization. Critics of Chapter 11 often point out that managers of distressed firms always file for reorganization, in the hope that a ''miracle'' will restore the firm to solvency before a final decision is made (see, for instance, Bradley and Rosenzweig, 1992). Such perverse incentives may be reduced by improving the design of reorganization laws, but they may be hard to eliminate altogether.…”