Destruction of Value in the New Era of Chapter 11

Abstract

The Bankruptcy Reform Act of 1978 placed corporate managers in control of corporate debtors in bankruptcy and of the bankruptcy process. Although the act remains law, between 2000 and 2001 it became common for creditors to control financially distressed firms and the bankruptcy process. This study tests whether the change from manager to creditor control created or exacerbated managerial incentive to delay filing for bankruptcy or gave secured creditors an opportunity to delay such filing. We observe a significant and prolonged deterioration in the financial condition of firms that filed for bankruptcy after 2001 as compared to firms that filed before 2000. We also observe patterns of operating losses and liquidations that suggest adverse economic consequences from such delay.