Liquidation vs. Continuation: Did Reorganized Firms Do the Right Thing?

Dice Center for Research in Financial Economics 95-12

31 Pages Posted: 1 Apr 1998

See all articles by Michael J. Alderson

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business

Brian L. Betker

Saint Louis University

Abstract

Bankrupt firms should reorganize if the wealth created by continuing is expected to exceed the wealth that would be created by liquidating. We examine 88 firms that reorganized in Chapter 11 and find that, despite having sub-standard accounting profitability, more than 80% created more wealth by continuing rather than liquidating. Even firms that later completed second debt restructurings, on average, should not have liquidated the first time around. Cross-sectional results indicate that firms that complete prepackaged bankruptcies, emerge from bankruptcy with low debt ratios, and that avoid second restructurings are more successful under our performance measure. Among high growth-option firms, those whose net investment exceeds their industry median create more wealth than firms whose net investment is less than their industry median. However, among low growth option firms, superior performance is found among firms that shrink relative to their industry.

JEL Classification: G33

Suggested Citation

Alderson, Michael J. and Betker, Brian L., Liquidation vs. Continuation: Did Reorganized Firms Do the Right Thing?. Dice Center for Research in Financial Economics 95-12, Available at SSRN: https://ssrn.com/abstract=46902 or http://dx.doi.org/10.2139/ssrn.46902

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States
314-977-8169 (Phone)
314-977-3897 (Fax)

Brian L. Betker

Saint Louis University ( email )

St. Louis, MO 63108-3397
United States