Corporate financial distress and reorganization : an empirical analysis of pre- and post chapter 11 leverage

Abstract

In this thesis our objective is to expand current knowledge on determinants of Chapter 11 outcomes. We do this by investigating pre- and post-reorganization leverage from a sample of 103 large public U.S. firms filing for bankruptcy in the period 1990-2013, that emerge as public firms. Specifically, we examine leverage for firms recontracting under Chapter 11 and analyze outcomes based on how, when and where the firms reorganize. We estimate the probability that firms emerge with leverage above their industry median, and arrive at the conclusion that firms twice as leveraged as the industry when filing for Chapter 11 are up to ∼32 times more likely to be over-leveraged when emerging. Our analysis suggests that high leverage appears to be chronic. Significant factors impacting post-bankruptcy leverage are identified and include; pre-filing capital structure, venue choice and asset liquidations. Further, we find that the amendments to the U.S. Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Protection Act do not seem to affect the reorganization outcome for firms in our sample. To the best of our knowledge, the results in this thesis are unique. As our review of related literature uncovers, post-reorganization leverage remains unexplored territory. In particular, we are the first to explain leverage for firms that emerge, based on how, when and where these firms reorganize.