Investment decisions under Chapter 11 bankruptc

The dissertation consists of three essays which consider the effect of the Chapter 11 Bankruptcy process on real investment decisions.;The first essay examines the performance of 197 public companies which emerged from Chapter 11 Bankruptcy. Almost 40% of the sample firms continue to experience operating losses in the two years following bankruptcy, while over 16% file a second time. Management often retains substantial influence over restructuring decisions during bankruptcy, and frequently is not replaced until a plan of reorganization has been confirmed. The continued involvement of pre-bankruptcy management in the restructuring process is strongly associated with poor post-bankruptcy performance. The substantial number of firms emerging from Chapter 11 which are not viable or which need further restructuring provides little evidence that the process effectively rehabilitates distressed firms, and is consistent with the view that there are economically important biases toward continuation of unprofitable firms.;The second essay studies the outcomes of attempted reorganizations for a large sample of public companies that filed under Chapter 11 of the Bankruptcy Code. Based on hypotheses suggested by theoretical models of the reorganization, this paper examines the relationship of industry conditions, pre-bankruptcy capital structure, characteristics of management and pre-bankruptcy firm characteristics to the reorganization/liquidation choice. The results show that industry conditions, in particular high leverage of other firms in the industry, increase the probability of liquidation. Larger firms, particularly those with public debt outstanding prior to filing, have a greater probability of emergence from bankruptcy. There does not appear to be strong support for models which suggest capital structure affects the decision. Finally, there is weak support for the idea that newly appointed board members are more responsive to creditor pressures to liquidate.;The third essay examines asset sale decisions by large public companies entering bankruptcy. The paper examines stock price reactions to announcements of asset sales, and finds contrasting effects for asset sales before versus during bankruptcy. The evidence presented is consistent with hypotheses that, particularly prior to bankruptcy, agency conflicts may lead to asset sales which are not necessarily value enhancing.