Surviving Chapter 11 Bankruptcies: Duration and Payoff?

25 Pages Posted: 17 Aug 2007

See all articles by Maxwell Stevenson

Maxwell Stevenson

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Brad Wong

The University of Sydney

Violet Torbey

QSuper Ltd

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Abstract

Three of the authors previously developed a model to predict the duration of Chapter 11 bankruptcy and the payoff to shareholders (Partington et al., 2001). This work augments that study using a much larger sample to re-estimate the model and assess its stability. It also provides an opportunity for out-of-sample testing of predictive accuracy. The resulting models are based on Cox's proportional hazards model and the current article points to the need to test two important assumptions underlying the model. First, that the hazards are proportional and, second, that censoring is independent of the event studied. Using the extended data set, all the previously significant accounting variables drop out of the model and only two covariates of the original model remain significant. These are the market wide credit spread and the market capitalization of the firm, both measured immediately prior to the firm's entry to Chapter 11. Receiver operating characteristic curves are then used to assess the predictive accuracy of the original and extended models. The results show that Lachenbruch tests can provide a misleading indication of predictive ability out of sample. Using the Lachenbruch method of in-sample testing, both models show predictive power, but in a true out-of-sample test they fail dismally. The lessons of this work are relevant to better predicting the gains and losses likely to accrue to shareholders of companies in Chapter 11 bankruptcy and in similar administrative arrangements in other jurisdictions.

Suggested Citation

Stevenson, Max and Wong, Brad and Torbey, Violet and Partington, Graham, Surviving Chapter 11 Bankruptcies: Duration and Payoff?. Abacus, Vol. 43, No. 3, pp. 363-387, September 2007, Available at SSRN: https://ssrn.com/abstract=1007550 or http://dx.doi.org/10.1111/j.1467-6281.2007.00236.x

Max Stevenson

University of Sydney - School of Business - Finance Discipline ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Brad Wong

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Violet Torbey

QSuper Ltd

GPO Box 200
Brisbane Qld 4001
Australia

Graham Partington (Contact Author)

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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