An Empirical Investigation of Liquidation Choices of Failed High-Tech Firms

Abstract

This paper compares a dataset of failed venture-backed firms to information about the firm's liquidation choices. The first finding is that firms in California are much less likely to use the bankruptcy process than firms in other states, largely because of their ability to use a cheaper and less formal assignment for the benefit of creditors procedure. The paper explores a number of reasons why that procedure succeeds in California more than it does elsewhere, including differences in statutory support for the procedure, the sophistication of market participants in California, the close-knit venture communities in California, and unusual rules of 9th circuit bankruptcy law.

The second finding comes from the data about the firms that did file for bankruptcy. Generally, those firms were much larger, with much greater amounts and varieties of debt than previous scholars had predicted. The paper uses that data to discuss the role that bankruptcy can play in the liquidation of high-tech firms.

Keywords: bankruptcy, software, venture capital

JEL Classification: K20