We present the first comprehensive empirical estimates of filtering failure in court‐supervised reorganization. Using a sample of 303 firms attempting reorganization in Canada during 1977–1988, we find that Type I errors (accepting a plan from a nonviable firm) are four times more likely to occur than Type II errors (rejecting a plan from a viable firm) and that the incidence of filtering failure is between 22 and 53 percent or 18 and 44 percent, depending on the definition of a firm's viability.

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