Liquidation Versus Continuation: Did Reorganized Firms Do the Right Thing?

95-12

Posted: 5 Jul 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

Date Written: November 1995

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 firms 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 Versus Continuation: Did Reorganized Firms Do the Right Thing? (November 1995). 95-12, Available at SSRN: https://ssrn.com/abstract=7137

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 (Contact Author)

Saint Louis University ( email )

St. Louis, MO 63108-3397
United States

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