Chapter 11 reorganization policy and the economic viability of filing firms

The purpose of this study is to establish empirical proxies for the economic viability of firms in financial distress and to ascertain their role in reorganization policy. The data suggest that firms with stronger pre-bankruptcy operating performance, higher pre-bankruptcy leverage, and higher industry-adjusted market-to-book ratios exhibit stronger post-reorganization performance. Pre-bankruptcy industry performance, both the level of and the change in, suggests that firms in stronger industries perform better following reorganization. Pre-bankruptcy operating performance is negatively related, and firm size is positively related, to the length of time spent in court. Pre-bankruptcy operating performance is negatively related to the likelihood of subsequent restructuring or liquidation and positively related to the likelihood of being acquired. I find no evidence to suggest that pre-bankruptcy operating performance, leverage, or market-to-book ratios are significant factors in reorganization policy. Rather, firm size appears to be the primary determinant. Larger firms are more likely to be reorganized and smaller firms are more likely to liquidate.