We employ straightforward proxies to identify firms in financial versus economic distress
and show that Chapter 11 outcomes and asset restructurings vary according to these firm
types. The results from our sample of large bankruptcies from 1991 to 2004 are
consistent with the view that the Chapter 11 process preserves the going concern value of
financially distressed firms while redeploying the assets of economically distressed firms.
These results hold for asset redeployments resulting both from liquidations or
acquisitions and those resulting from partial asset liquidations of firms that reorganize in
Chapter 11. The empirical findings run counter to concerns that inefficiencies and
conflicts of interest severely compromise the Chapter 11 process. Further, we provide
the first empirical evidence that the put option inherent in lease contracts is frequently
exercised in Chapter 11, that the disposition of lease contracts in bankruptcy constitutes a
large portion of asset restructurings, and that the ability to put lease contracts may
mitigate the indirect costs of asset fire sales. We also find that unionized firms
experience smaller debt reductions in Chapter 11 than do non-unionized firms.
(Joint work with  Yung-Yu Ma and Elizabeth Tashjian (University of Utah), January 2009.)