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Emerging from Chapter 11 Bankruptcy: Is It Good News or Bad News for Industry Competitors?


  • Gaiyan Zhang

    1. Gaiyan Zhang is an Assistant Professor in the College of Business Administration at the University of Missouri-St. Louis, St. Louis, MO 63121.
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  • I appreciate many constructive suggestions by Bill Christie (editor), Jean Helwege, Philippe Jorion, Neal Stoughton, and one anonymous referee. All remaining errors are my own.


A firm under Chapter 11 bankruptcy protection may emerge from bankruptcy in a more advantageous competitive position within its industry to the detriment of their industry rivals. Using a sample of 264 firms that emerged from Chapter 11 bankruptcy during the period 1999-2006, I find that its industry competitors demonstrate negative postemergence long-term equity returns and deteriorating financial performance. Additional tests indicate that this outcome is less likely due to overall industry distress. Competitors tend to be more adversely affected if they are in more concentrated industries, if they have lower credit quality, when a more efficient firm emerges, and when the duration of bankruptcy is longer. This study suggests a need to reconsider Chapter 11's role in promoting competition and allocation of resources given its negative externalities on industry competitors.