The Supply Chain Effect of Bankruptcy Reorganization
Song Alex Yang
London Business School
John R. Birge
University of Chicago - Booth School of Business
Rodney P. Parker
University of Chicago Booth School of Business
May 8, 2013
Bankruptcy reorganization is a costly legal process designed to relieve operationally viable companies from their financial obligations. It allows the bankrupt firm to avoid liquidation and to continue creating value through operations. Focusing on the interaction of supply chain structures and the cost of reorganization, this paper studies the influence of bankruptcy reorganization on both ex ante and ex post operations and performances of the financially distressed firm, its competitor, and its supplier under three supply chain structures. In a supply chain with two firms competing horizontally, we find that the competitor benefits from more costly reorganization both before and after bankruptcy. In a single-supplier-single-buyer chain, more costly reorganization induces more supplier concession, lowering the distressed buyer's operational costs both before and after bankruptcy. In both scenarios, consumers may benefit from more costly reorganization in the long run, through either more intense competition or lower costs. Finally, in the supply chain with two competing firms facing a common supplier, we find the financially distressed firm may act as a negative externality to its competitor as low-cost reorganization allows the former to gain operational advantage. Balancing its own cost in the distressed buyer's bankruptcy and the non-distressed buyer's incentive, the supplier may pull the distressed firm out of or push it into bankruptcy. Different from the previous two scenarios, in this case, consumers prefer less costly reorganization. We also show that the reorganization efficiency can be further improved when the supplier and the distressed buyer are financially linked, and that requiring the supplier to treat the distressed and non-distressed firms equally may benefit the supplier, but not necessarily consumers.
Number of Pages in PDF File: 35
Keywords: bankruptcy, Chapter 11, reorganization, operations and finance interface, supply chain structure, operational competitivenessworking papers series
Date posted: June 10, 2012 ; Last revised: June 23, 2013
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