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Is Cash Auction Procedure a Bargain? Evidence from U.S. Bankruptcy Courts

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  • Ning Zhu

Abstract

This paper offers large sample evidence on bankruptcy costs for more than 800 Chapter 7 and Chapter 11 cases in two U.S. bankruptcy courts. For the comprehensive sample comprising mostly of small and private firms, bankruptcy costs account for about three percent of pre-filing book asset values for both chapters. The time that firms spend in bankruptcy procedure averages about 23 months, also similar between Chapter 7 and Chapter 11 cases. Contrary to previous belief, Chapter 7 procedure, which is essentially a cash auction system, is not particularly economical or timesaving than Chapter 11 procedure. Firms with greater pre-bankruptcy assets and more complicated financial structure tend to choose Chapter 11 and incur greater bankruptcy costs. Higher management equity holdings lead to greater bankruptcy costs but cannot explain why firms choose Chapter 11 instead of Chapter 7.

Suggested Citation

  • Ning Zhu, 2003. "Is Cash Auction Procedure a Bargain? Evidence from U.S. Bankruptcy Courts," Yale School of Management Working Papers ysm370, Yale School of Management, revised 01 Sep 2009.
    • Handle: RePEc:ysm:wpaper:ysm370
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    File URL: https://repec.som.yale.edu/icfpub/publications/2487.pdf
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