An Empirical Analysis of the Firm's Reorganization Decision

Timothy Fisher and Jocelyn Martel

Finance, 2009, vol. 30, issue 1, 121-149

Abstract: While the bankruptcy framework introduced in the seminal work of Bulow & Shoven, later extended by White, has been the foundation for theoretical work in the area for the last 20 years, it has never been empirically tested. The paper empirically examines the liquidation-reorganization decision using micro data on 640 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White framework: the probability of reorganization increases with the level of free assets, the amount of debt reduction, and firm size while it decreases with the firm?s liquidation value. Results also show that the BSW framework does not provide a complete picture of the firm?s reorganization decision. In particular, the relative size of Crown (government) claims, the legal form of the firm, and the asset/debt ratio are also significant determinants of the reorganization decision.

Date: 2009
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