Bankruptcy Risk, Costs and Corporate Diversification
53 Pages Posted: 20 Jan 2012 Last revised: 24 Jan 2012
Date Written: November 17, 2011
This paper studies the impact of diversification on firms that file for Chapter 11 bankruptcy. Prior research suggests that diversification affects both the probability and costs of distress. Treating bankruptcy as a special case of distress, we find that diversification reduces the likelihood of bankruptcy and liquidation in Chapter 11, which is consistent with the coinsurance hypothesis. However, we observe higher bankruptcy costs as measured by time spent in Chapter 11 and inefficient segment investment for diversified firms. Our evidence is consistent with the idea that diversification provides benefits to managers in terms of job security rather than to firms. Our findings may help firms to make diversification decisions and creditors determine lending policies toward different forms of organizations.
Keywords: Bankruptcy cost, Bankruptcy risk, Corporate diversification, Chapter 11
JEL Classification: G32, G33, G34
Suggested Citation: Suggested Citation