Bankruptcy Fire Sales
Lynn M. LoPucki
University of California, Los Angeles (UCLA) - School of Law
Joseph W. Doherty
University of California, Los Angeles - School of Law
Michigan Law Review, Vol. 106, 2007
UCLA School of Law, Law-Econ Research Paper No. 07-07
For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy, an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete. Going concern value could be captured through sale.
This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period. We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales. We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.
We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices. Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor's industry is lower - the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992.
Number of Pages in PDF File: 61
Keywords: bankruptcy, sales, reorganizations, recoveries, market, merger and acquisition, corruption
JEL Classification: G33, K22, D23, D44, K49
Date posted: April 16, 2007