The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization





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    • Arturo Bris is at IMD Yale School of Management, and ECGI. Ivo Welch is at Brown University Department of Economics and the National Bureau of Economics Research (NBER). Ning Zhu is at the University of California at Davis. We wish to thank our team of research assistants: Stephanie Mastrobuono, Carolina Velosa, Theresa Kwon, Vanessa Janowski, and Jennifer Gao. We also thank Ed Altman, Douglas Baird, Judge Samuel Bufford, Espen Eckbo, Hulya Eraslan, Rick Green, Edith Hotchkiss, Steven Kaplan, Edward Morrison, Dina Naples-Layish, David Scharfstein (our discussant at the American Finance Association meetings), and Alan Schwartz for their individual comments. We thank seminar audiences at the American Finance Association, the University of Southern California, New York University, Columbia University, the European Finance Association, Insead University, and the NBER. Finally, we thank both a terrific anonymous referee and Rick Green (the editor), who were willing to bear with us through mediocre earlier drafts.


Our paper explores a comprehensive sample of small and large corporate bankruptcies in Arizona and New York from 1995 to 2001. Bankruptcy costs are very heterogeneous and sensitive to the measurement method used. We find that Chapter 7 liquidations appear to be no faster or cheaper (in terms of direct expense) than Chapter 11 reorganizations. However, Chapter 11 seems to preserve assets better, thereby allowing creditors to recover relatively more. Our paper also provides a large number of further empirical regularities.