Academic journal article International Review of Management and Business Research

Corporate Multinational Flexibility Option and Bankruptcy Resolution

Academic journal article International Review of Management and Business Research

Corporate Multinational Flexibility Option and Bankruptcy Resolution

Article excerpt

Introduction

Over the years following the Bankruptcy Reform Act of 1978, a great deal of the literature has examined the Chapter 11 bankruptcy issues including the determinants of Chapter 11 filing (Gilson, John and Lang, 1980; Charterjee, Dhillon and Ramirez, 1996; Kim and Kwok, 2009), the corporate decisions during Chapter 11 process (Maksimovic and Phillips, 1998), the duration of Chapter 11 process (Bandopadhyaya, 1994; Orbe, Ferreira and Nunez-Anton, 2002), and outcomes and post-performance (Franks and Torous, 1994; Hotchkiss, 1995).

More recently, some have examined Chapter 11 firms through the entire reorganization process. Denis and Rodgers (2007) find that among firms that filed Chapter 11, smaller firms have better operating performance, and those in higher operating margin industries spend less time in Chapter 11. They also show that firms are more likely to emerge as going concerns and to achieve positive post-reorganization profitability if they significantly reduce assets and liabilities while in Chapter 11.

None of the recent studies on Chapter 11 process, however, has examined the impact of a firm?s multinational network, more specifically a firm?s multinational flexibility option on the resolution of Chapter 11 reorganization, to the best of our knowledge. Therefore, the objective of this study is to explore the effects of a firm?s multinational network on the Chapter 11 bankr uptcy process, specifically focusing on the immediate outcomes of Chapter 11 reorganization and on the duration in the Chapter 11 process.

Numerous studies find a positive relationship between a firm?s multinationality and its value. For example, Kogut and Kulatilaka (1994) posit that an increase in multinationality enhances corporate flexibility and thereby reduces risk. Other studies find that multinational enterprises (MNEs) have greater competitive options, operational flexibility, and advantages in production and distribution (Caves, 1996; Dunning and McQueen, 1981; Kim, Hwang and Burgers, 1993; Rugman, 1982), which may create opportunities for more rapid as well as more successful emergence from the Chapter 11 bankruptcy process than domestic enterprises (DEs).

In this study, we use a sample of 403 U.S. companies (with 204 MNEs and 199 DEs) that filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We find that MNEs are more likely to emerge from Chapter 11 bankruptcy than DEs. Further examination shows that neither foreign sales ratio nor foreign assets ratio is a significant predictor of successful emergence from Chapter 11. However, the number of foreign countries with a revenue-generating subsidiary is a significant predictor of the emergence. A firm?s multinationality per se does not seem to improve the likelihood of emergence from bankruptcy, but the scope of multinational network does, due to the network advantages like operating flexibility, tax savings, and financing. The results also indicate that, on average, MNEs spent 34.2 more days in bankruptcy than DEs, but this difference is not statistically significant.

Reviewed in the next section are foundational theories and essential empirical studies, and research hypotheses are developed. The next section presents the data and research methods, followed by a section of empirical findings. The last section offers the summary and conclusions.

Literature Review and Testable Hypotheses

Chapter 11 Reorganization Process

Outcomes of Chapter 11 reorganization: Filing for corporate bankruptcy is required under Chapter 11 of the 1978 Bankruptcy Code, where management and owners seek court protection against creditors and other claimants while their firm undergoes formal reorganization.

Under this situation, the firm can undertake a prepackaged bankruptcy, or it has 120 days following the filing date to propose a plan of reorganization. Once the plan is filed, creditors can approve via unanimous consent or the court unilaterally imposes the reorganization plan. …

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