Do the Right Firms Survive Bankruptcy?
73 Pages Posted: 30 May 2019 Last revised: 9 Apr 2021
Date Written: April 8, 2021
In U.S. Chapter 11 bankruptcy cases, firms are either reorganized, acquired, or liquidated. I show that decisions to liquidate often reduce creditor recovery, costing creditors billions of dollars every year. I exploit the within-district random assignment of bankruptcy judges to estimate a structural model of bankruptcy. I estimate that liquidation is frequently chosen when a reorganization would have maximized total creditor recovery. Liquidations involving "363 sales," in which managers sell assets without creditor approval, are especially harmful for creditors. I estimate that courts could dramatically improve creditor recovery by assigning liquidations using a statistical model.
Keywords: bankruptcy, recovery rate, structural estimation, Roy model, 363 sales
JEL Classification: G33, G38, K22
Suggested Citation: Suggested Citation