Asset Efficiency and Reallocation Decisions of Bankrupt Firms

Authors

  • VOJISLAV MAKSIMOVIC,

    1. University of Maryland Business School, College Park
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  • GORDON PHILLIPS

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    • The authors are at the University of Maryland Business School, College Park. We thank Judy Chevalier, John Graham, Charles Hadlock, Kathleen Weiss Hanley, Marc Lipson, Colin Mayer, Pegaret Pichler, Jay Ritter, David Scharfstein, Alex Triantis, Henri Servaes, Sheridan Titman, Luigi Zingales, an anonymous referee, and the editor René Stulz. We are grateful to seminar participants at Boston College, the University of Chicago, Columbia University, the Board of Governors of the Federal Reserve System, the University of Georgia, the University of Maryland, MIT, the University of North Carolina, New York University, Southern Methodist University, the University of Texas at Austin, Tulane University, the University of British Columbia, the University of Utah, Vanderbilt University, the University of Virginia, and the Wharton School of Business for helpful comments. We are also grateful to participants at the meetings of the American Finance Association, the Center for Policy Research, and at the National Bureau for Economic Research. We also thank SuZanne Peck, Bob McGuckin, and researchers at the Center for Economic Studies for data help and discussions on this project. This work was conducted at the Center for Economic Studies, U.S. Census Bureau, where Phillips was an ASA/NSF research fellow.

Abstract

This paper investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant-level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales, and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs.

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