Is Chapter 11 Costly?

40 Pages Posted: 15 Jan 2007  

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Rajeev Singhal

Oakland University

Elizabeth Tashjian

University of Utah - Department of Finance

Abstract

We examine a sample of 459 firms filing for Chapter 11 during the period 1991 to 1998 and find that our sample firms experience significant improvements in their operating performance during Chapter 11. Our evidence is consistent with the hypothesis that Chapter 11, if anything, provides net benefits to bankrupt firms. In the cross section, firms with higher debt ratios experience greater improvements in operating performance, and the complexity of the renegotiation process negatively affects the improvement. We find no relationship between Chapter 11 outcome and changes in risk-adjusted firm value in Chapter 11.

Keywords: indirect bankruptcy costs, Chapter 11, bankruptcy

JEL Classification: G33

Suggested Citation

Kalay, Avner and Singhal, Rajeev and Tashjian, Elizabeth, Is Chapter 11 Costly?. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=956929

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Rajeev Singhal

Oakland University ( email )

Rochester, MI 48309-4401
United States

Elizabeth Tashjian

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801- 585-3212 (Phone)
801- (Fax)

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