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Efficiency of Bankrupt Firms and Industry Conditions: Theory and Evidence

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  • Gordon M Phillips
  • Vojislav Maksimovic

Abstract

We show that the incentives to reorganize inefficient firms and redeploy their assets depend on the change in industry output and industry characteristics. We use plant-level data to investigate the productivity of Chapter 11 bankrupt firms and asset-sale and closure decisions. We find no evidence of bankruptcy costs in industries with declining output growth, where most bankruptcies occur. In declining industries, bankrupt firms’ plants are not less productive than industry averages and do not decline in productivity while in Chapter 11. In these industries, Chapter 11 appears to be a mechanism for fostering exit of capacity. In high-growth industries, there is some limited evidence of productivity declines while in Chapter 11 for a subsample of firms that remain in Chapter 11 for four or more years. Examining asset sales and closures by bankrupt firms and their competitors, we find that Chapter 11 status is of limited importance in predicting these decisions once industry and plant characteristics are taken into account. More generally, the findings imply that Chapter 11 may involve few real economic costs, and that industry effects and sample selection issues are very important in evaluating the performance of bankrupt firms.

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File URL: ftp://ftp2.census.gov/ces/wp/1996/CES-WP-96-12.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 96-12.

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Date of creation: Oct 1996
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Handle: RePEc:cen:wpaper:96-12

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Keywords: CES; economic; research; micro; data; microdata; chief; economist;

References

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Citations

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Cited by:
  1. Morellec, Erwan, 2001. "Asset liquidity, capital structure, and secured debt," Journal of Financial Economics, Elsevier, vol. 61(2), pages 173-206, August.
  2. Gregor Andrade & Steven N. Kaplan, 1997. "How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," NBER Working Papers 6145, National Bureau of Economic Research, Inc.
  3. Palia, Darius & Lichtenberg, Frank, 1999. "Managerial ownership and firm performance: A re-examination using productivity measurement," Journal of Corporate Finance, Elsevier, vol. 5(4), pages 323-339, December.
  4. Wiklund, Johan & Baker, Ted & Shepherd, Dean, 2010. "The age-effect of financial indicators as buffers against the liability of newness," Journal of Business Venturing, Elsevier, vol. 25(4), pages 423-437, July.

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