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Financial Restructuring in Fresh-Start Chapter 11 Reorganizations


  • We thank an anonymous referee, Ed Altman, Yakov Amihud, Matt Billett, Todd Houge, Tod Perry, and seminar participants at Baruch College, College of William & Mary, DePaul University, Norwegian School of Economics and Business Administration, Ohio State University, University of Delaware, University of Iowa, and University of Nebraska for helpful comments, and David Gilbert, Marilyn Li, Szu-Chen Lin, Sarah Rudasill, Xiaolin Wu, and Zhou Pang for valuable research assistance.


We find that firms substantially reduce their debt burden in “fresh-start” Chapter 11 reorganizations, yet they emerge with higher debt ratios than what is typical in their respective industries. While cross-sectional regressions reveal that post-reorganization debt ratios are more in line with the predictions of the static trade-off theory, they also reveal that pre-reorganization debt ratios affect post-reorganization debt ratios. Collectively, these results suggest that impediments in Chapter 11 prevent firms from completely resetting their capital structures. We also find that firms that reported positive operating income leading up to Chapter 11 emerge faster, suggesting that it is quicker to remedy strictly financial distress than economic distress.