An Evaluation of Chapter 11 Bankruptcy Filings in a Competing Risks Framework

By Jaggia, Sanjiv; Thosar, Satish | Journal of Economics and Finance, July 2019 | Go to article overview

An Evaluation of Chapter 11 Bankruptcy Filings in a Competing Risks Framework


Jaggia, Sanjiv, Thosar, Satish, Journal of Economics and Finance


(ProQuest: ... denotes formulae omitted.)

1Introduction

Chapter 11 of the U.S. Bankruptcy Code is the framework under which financially distressed firms have the opportunity to reorganize rather than liquidate and cease operations. The fairness and efficiency of the legal system is clearly an important consideration for all the parties involved and given the spate of high-profile corporate failures during the recent financial crisis, we think it is both timely and relevant to revisit this issue.

It is important to identify the firm-specific and other factors that may be associated with bankruptcy survival and emergence as viable business entities. Much research has focused on this task and it turns out that many of the determinative factors are actions taken after the firm enters Chapter 11 protection. For example, Bogan and Sandler (2012) report that a strong element associated with post-bankruptcy survival is replacing incumbent management. Denis and Rodgers (2007) state: 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.

In this paper, we address a narrower question which can be thought of as a precursor to post reorganization going-concern viability. We seek to identify and assess the impact of the ex-ante factors on the outcome (and duration) of a Chapter 11 petition: court approval of a reorganization plan or case dismissal effectively resulting in the firm's liquidation. This is important because as LoPucki and Doherty (2015) point out many interested parties have to make key decisions at the point (or soon after) the Chapter 11 case is filed. These include "managers, employees, suppliers, and customers" who have to decide "whether to continue in their relationships with the debtor during the case". Providers of capital have to make judgements about the nature of the revised terms they may accept and so on.

There are essentially three phases in the Chapter 11 process: filing to plan, plan to confirmation (or dismissal), and confirmation to closure (see Bris et al. 2006). Our analysis encompasses the first two phases - the process that begins with a filing before a bankruptcy court and culminates in court approval or rejection of the reorganization plan. This period generates most of the direct costs of bankruptcy - lawyers and accountants fees, court fees and the like. Indirect costs such as loss of sales due to customers switching to competitors, the departure of key employees etc. are harder to measure and thus bankruptcy duration has been used in the literature as an imperfect but serviceable proxy (see Franks and Torous 1989 and Thorburn 2000). It is therefore clearly important to examine the factors that affect not just the outcome of the Chapter 11 filing but the duration of the legal process.

Several studies have analyzed Chapter 11 bankruptcy from this perspective. LoPucki and Doherty (2015) examine bankruptcy survival in a logit framework where the dependent variable takes value 1 if the firm emerges successfully from Chapter 11 protection, 0 otherwise. This approach does not endogenize the time element and the estimators are potentially biased since the logit model ignores cases which are still active at the end of the data acquisition period (right censored observations). Bandopadhyaya (1994), Li (1999), and Partington et al. (2001) estimate hazard models that do capture duration and censoring in bankruptcy applications. However, such models only estimate the reorganization probability and also may not be appropriate since they implicitly assume that all firms that file for Chapter 11 bankruptcy will eventually get reorganized. This is clearly not the case because a number of firms are eventually denied protection and liquidated under Chapter 7. Ignoring such outcomes could also result in biased estimators.

We believe that a competing risks framework appropriately utilizes the outcome as well as event duration in the estimation procedure. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

An Evaluation of Chapter 11 Bankruptcy Filings in a Competing Risks Framework
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.