Bankruptcy as a deliberate strategy: Theoretical considerations and empirical evidence
Article first published online: 8 NOV 2006
Copyright © 1993 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 14, Issue 2, pages 125–135, February 1993
How to Cite
Moulton, W. N. and Thomas, H. (1993), Bankruptcy as a deliberate strategy: Theoretical considerations and empirical evidence. Strat. Mgmt. J., 14: 125–135. doi: 10.1002/smj.4250140204
- Issue published online: 8 NOV 2006
- Article first published online: 8 NOV 2006
- Manuscript Revised: 18 OCT 1992
- Manuscript Received: 6 JUN 1991
- business failure;
- financial distress;
Bankruptcy and bankruptcy reorganizations have been identified as remedies for financial distress, but there is little agreement on their value to firms, managers, and the general economy. This paper provides a brief review of proposed bankruptcy strategies and some alternative views about their costs and benefits followed by an empirical study of the outcomes of 73 bankruptcies and subsequent reorganization efforts. The evidence suggests that there are few successful reorganizations, bankruptcy is a costly response to financial distress, and managerial choice in bankrupt firms is highly constrained by forces external to the firm. The diversity of stakeholder interests limits the value of global judgements about success or failure of bankruptcy strategies. Firm size dominates all other factors in predicting success in completing the reorganization process. Delayed filings primarily reflect failed efforts to avoid bankruptcy, not deliberate strategies. Reasons for the use of bankruptcy in spite of its high costs are discussed.