REORGANIZATION OR LIQUIDATION: BANKRUPTCY CHOICE AND FIRM DYNAMICS

P. Dean Corbae and Pablo D'Erasmo

No 17-14, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a firm dynamics model with endogenous entry and exit to include both bankruptcy options in a general equilibrium environment. Finally, we evaluate a bankruptcy policy change recommended by the American Bankruptcy Institute that amounts to a \fresh start\" for bankrupt _rms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure, which via selection affects productivity (allocative effciency rises by 2:58%) and welfare (rises by 0:54%).

Keywords: bankruptcy laws; corporations; United States (search for similar items in EconPapers)
Pages: 66 pages
Date: 2017-06-13
New Economics Papers: this item is included in nep-bec, nep-dge and nep-ent
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics (2021)
Working Paper: Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics (2020)
Working Paper: Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics (2017)
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