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Serial bankruptcy: plan infeasibility or just bad luck?

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  • Karen Denning
  • Stephen Ferris
  • Robert Lawless

Abstract

Through a comparison of serial and once bankrupt firms over the period 1970-1996, those factors that lead to a successful reorganization are examined. It is found that serial bankrupt firms generally fail to restructure their top management around the time of their initial reorganization while over 70% of the sample of once bankrupt firms replace their senior executives. Serial bankrupt firms increase their level of fixed payments, are less able to lower their debt coupon rate and issue more equity than their once-bankrupt matches. It is further found that firm growth, performance, liquidity and size are associated with a greater likelihood of a successful reorganization. Firm risk as measured by financial leverage increases the probability of a subsequent bankruptcy. These results are useful to both bankruptcy courts and corporate managers seeking to discriminate between feasible and unrealistic reorganization plans following bankruptcy.

Suggested Citation

  • Karen Denning & Stephen Ferris & Robert Lawless, 2001. "Serial bankruptcy: plan infeasibility or just bad luck?," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 105-109.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:2:p:105-109
    DOI: 10.1080/13504850150204156
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    References listed on IDEAS

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    1. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
    2. Hotchkiss, Edith Shwalb, 1995. "Postbankruptcy Performance and Management Turnover," Journal of Finance, American Finance Association, vol. 50(1), pages 3-21, March.
    3. Betker, Brian L, 1995. "Management's Incentives, Equity's Bargaining Power, and Deviations from Absolute Priority in Chapter 11 Bankruptcies," The Journal of Business, University of Chicago Press, vol. 68(2), pages 161-183, April.
    4. Gilson, Stuart C & Vetsuypens, Michael R, 1993. "CEO Compensation in Financially Distressed Firms: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 48(2), pages 425-458, June.
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    Cited by:

    1. Minchoul Kim & Minho Kim & Ronald McNiel, 2008. "Predicting survival prospect of corporate restructuring in Korea," Applied Economics Letters, Taylor & Francis Journals, vol. 15(15), pages 1187-1190.
    2. Andreas Lehnert & Dean M. Maki, 2002. "Consumption, debt and portfolio choice: testing the effect of bankruptcy law," Finance and Economics Discussion Series 2002-14, Board of Governors of the Federal Reserve System (U.S.).

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