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Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics

P. Dean Corbae () and Pablo D'Erasmo ()

No 23515, NBER Working Papers from National Bureau of Economic Research, Inc

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 firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity (allocative efficiency rises by 2.58%) and welfare (rises by 0.54%).

JEL-codes: E22 G32 G33 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com and nep-mac
Note: CF EFG IFM
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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
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