The Changing Nature of Chapter 11

55 Pages Posted: 6 Mar 2008 Last revised: 16 Dec 2010

Sreedhar T. Bharath

Arizona State University - W.P. Carey School of Business

Venkatesh Panchapagesan

The Goldman Sachs Group, Inc.

Ingrid M. Werner

The Ohio State University - Fisher College of Business

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Date Written: November 1, 2010

Abstract

The U.S. Chapter 11 bankruptcy system has long been viewed as equity friendly, with absolute priority deviations (APD) in favor of equity holders occurring as often as in 75% of the cases in the 1980s. By contrast, based on a more recent and much larger sample of bankruptcies from the period 1991-2005 we document an average frequency of APDs of only 22%. Moreover, we find a secular decline in the frequency of APDs over our sample period. The time spent in bankruptcy has also declined steadily, from 23 months in the 1980s to 16 months after 2000. We argue and find evidence that innovations in the bankruptcy process, such as reliance on debtor-in-possession (DIP) financing and adoptions of key employee retention plans (KERPs) help explain this secular decline. We also find that APD are more likely when management has substantial share holdings in the firm. Collectively, these results suggest that Chapter 11 has become more creditor friendly in recent years.

Keywords: Bankruptcy, APR violations, Chapter 11

JEL Classification: G33, G34, G12

Suggested Citation

Bharath, Sreedhar T. and Panchapagesan, Venkatesh and Werner, Ingrid M., The Changing Nature of Chapter 11 (November 1, 2010). Fisher College of Business Working Paper No. 2008-03-003; Charles A. Dice Center WP No. 2008-4; AFA 2010 Atlanta Meetings Paper; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1102366 or http://dx.doi.org/10.2139/ssrn.1102366

Sreedhar T. Bharath

Arizona State University - W.P. Carey School of Business ( email )

400 E. Lemon Street
Tempe, AZ 85287
United States
347-256-8784 (Phone)

Venkatesh (Venky) Panchapagesan

The Goldman Sachs Group, Inc. ( email )

85 Broad Street
New York, NY 10004
United States

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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