Success factors in reorganization: What firms rise from the brink of liquidation? - A study of the firm-specific cross-sectional determinants of Chapter 11 duration and outcome

Abstract

Objectives This Master’s thesis sets out to investigate firm-specific success factors in reorganization. Specifically, the objectives of this study are to identify firm-specific determinants that explain the cross-sectional variation in firms’: (i) Chapter 11 duration and (ii) Chapter 11 outcome. To examine the significance of these determinants, this thesis performs univariate analyzes and estimates OLS as well as logistic regression models.

Data The data of this study consists of a unique hand-collected sample of U.S. listed firms that have filed for Chapter 11 during 1994-2003. All financial data is obtained from Thomson Reuter’s DataStream database. Information on Chapter 11 filing and resolution dates as well as on Chapter 11 outcomes is gathered by manually examining firm news and stock exchange releases, which are accessed via the Lexis-Nexis news database. For many of the larger firms, dates and initial outcomes are retrieved from the Bankruptcy Database, which can be accessed via Lexis-Nexis.

Results This thesis finds a number of firm-specific determinants that significantly explain cross-sectional variation in Chapter 11 duration and outcome. Empirical results indicate that smaller firms with higher pre-filing profitability spend less time in Chapter 11. However, while debt restructuring is shown to significantly increase a firm’s likelihood of a successful reorganization, larger reductions of debt considerably lengthen the Chapter 11 process. Consistent with the theories of economies of scale in bankruptcies, this study finds evidence of significant minimum Chapter 11 durations, suggesting there exists a fixed component in indirect bankruptcy costs. Furthermore, this study reports evidence that support earlier arguments that Chapter 11 durations have declined lately.

Larger firm size as well as higher pre-filing leverage and profitability are found to be related to an increased likelihood of a successful reorganization. Furthermore, firms that decrease their number of employees, cut capital expenditure and reduce leverage while in Chapter 11 significantly increase the likelihood of emergence. These results support the views that the existing Chapter 11 bankruptcy process allows promising firms to emerge. Taken together, the results of this thesis indicate that firms are able influence their fates in Chapter 11 and that certain restructuring actions significantly improve a firm’s chances of success in reorganization.