43 Pages Posted: 7 Sep 2014 Last revised: 20 Sep 2014
Date Written: September 19, 2014
Of the large, public companies that seek to remain in business through bankruptcy reorganization, only 70% succeed. The assets of the other 30% are absorbed into other businesses. Success is important both because it is efficient and it preserves jobs, communities, supplier and customer relationships, and tax revenues. This Article reports the findings of the first comprehensive study of the division into successful and failed reorganizations. Eleven conditions best predict companies’ survival prospects. First, a company that even hints in the press release announcing its bankruptcy that it intends to sell its business is highly likely to fail. Second, reorganizations assigned to more experienced judges are more likely to succeed. Third, companies headquartered in isolated geographical areas are more likely to fail. Fourth, companies that report greater shareholder equity are more likely to fail. Fifth, companies with creditors’ committees are more likely to fail. Sixth, companies with DIP loans are more likely to succeed. Seventh, companies that prepackage or prenegotiate their plans are more likely to succeed. Eighth, companies are more likely to succeed if interest rates are low in the pre-filing period. The final three conditions are that companies are more likely to succeed if they are larger, if they are manufacturers, and if they have positive operating income prior to filing. System participants can improve survival rates by shifting cases to more experienced judges and perhaps also by greater attention to the decisions to appoint committees, prenegotiate plans, obtain DIP loans, and publicly seek alliances.
Keywords: bankruptcy, reorganization, prediction, regression, judicial experience, leverage, creditors’ committees, mergers, liquidation, secured debt
JEL Classification: R10, K22, K19
Suggested Citation: Suggested Citation
LoPucki, Lynn M. and Doherty, Joseph W., Bankruptcy Survival (September 19, 2014). UCLA Law Review, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 14-11. Available at SSRN: https://ssrn.com/abstract=2492209