An evaluation of chapter 11 bankruptcy filings in a competing risks framework

Abstract

An important strand of research on corporate bankruptcies via Chapter 11 in the United States has appropriately focused on the firm characteristics associated with emergence as viable business entities. This necessarily involves considering factors (such as management changes) that arise during the restructuring process. We consider a narrower question - which ex-ante factors are important in influencing the bankruptcy court’s decision in a Chapter 11 application: approval of the reorganization plan or dismissal culminating in the firm’s liquidation. We use a competing risks model and find that while financial attributes such as firm size matter, the formation of a creditors committee, debt prepackaging prior to filing, and judicial experience significantly impact the outcome as well as the duration of the legal process. The latter is important because it clearly influences the direct costs of bankruptcy and has also been used in the literature as a useful proxy for harder to measure indirect costs. We believe our approach which explicitly captures the time dimension provides a useful input to the cost-benefit considerations associated with a Chapter 11 filing.