EconPapers    
Economics at your fingertips  
 

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 \ resh 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 law; United States; corporations (search for similar items in EconPapers)
Pages: 66 pages
Date: 2017-06-13, Revised 2017-06-13
New Economics Papers: this item is included in nep-bec, nep-dge and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
https://www.philadelphiafed.org/-/media/research-a ... 9b&utm_medium=E-mail Full text (application/pdf)

Related works:
Working Paper: Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics (2020) Downloads
Working Paper: Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:17-14

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-09-18
Handle: RePEc:fip:fedpwp:17-14