Chapter 11 bankruptcy outcomes and gubernatorial election cycles

Abstract

We find that Chapter 11 bankruptcy cases are more likely to result in emergence if decided shortly before a gubernatorial election, where the incumbent governor seeks re-election. However, firms emerging from bankruptcy during this period have a lower chance of long-term survival. These results suggest that governors promote the survival of bankrupt firms, even those without a sustainable business model, to increase their own chances of re-election. Consistent with governors trying to win the votes of employees, we find that gubernatorial interference increases when unemployment is high. One way governors support bankrupt firms is by securing them funding.

Keywords: Chapter 11 bankruptcy, gubernatorial influence, election cycle JEL codes: G33

JEL Classification: G33, D72