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An Empirical Analysis of the Firm's Reorganization Decision

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  • Timothy C.G. Fisher
  • Jocelyn Martel

Abstract

While the bankruptcy framework introduced in the seminal work of Bulow & Shoven, later extended by White, has been the foundation for theoretical work in the area for the last 20 years, it has never been empirically tested. The paper empirically examines the liquidation-reorganization decision using micro data on 640 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White framework: the probability of reorganization increases with the level of free assets, the amount of debt reduction, and firm size while it decreases with the firm?s liquidation value. Results also show that the BSW framework does not provide a complete picture of the firm?s reorganization decision. In particular, the relative size of Crown (government) claims, the legal form of the firm, and the asset/debt ratio are also significant determinants of the reorganization decision.

Suggested Citation

  • Timothy C.G. Fisher & Jocelyn Martel, 2009. "An Empirical Analysis of the Firm's Reorganization Decision," Finance, Presses universitaires de Grenoble, vol. 30(1), pages 121-149.
    • Handle: RePEc:cai:finpug:fina_301_0121
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    Cited by:

    1. Khan, Muhammad Azhar & Khan, Muhammad Zahir & Zaman, Khalid & Arif, Mariam, 2014. "Global estimates of energy-growth nexus: Application of seemingly unrelated regressions," Renewable and Sustainable Energy Reviews, Elsevier, vol. 29(C), pages 63-71.
    2. Blazy, Régis & Martel, Jocelyn & Nigam, Nirjhar, 2014. "The choice between informal and formal restructuring: The case of French banks facing distressed SMEs," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 248-263.
    3. Tatiana Škerlíková, 2012. "Findings from Literature Review with Focus on the Law Influence on Bankruptcy Initiation [Poznatky ze studia literatury zabývající se vlivem právní úpravy na zahájení insolvenčního řízení]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2012(4), pages 120-131.

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