Empirical Estimates of Filtering Failure in Court‐Supervised Reorganization

Abstract

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.

Assessing viability of Finnish reorganization and bankruptcy firms

“…In this context, viability is defined as the ability of a firm to continue business activities as a going concern. Viability can be measured by ex post (after the event period) or ex ante (before the event period) measures (Fisher and Martel 2004). In the former case, the measure is based on the observed outcome of the event (past statistics) while in the latter case it is constructed using the outcome predicted for the firm.…”

“…The study reported that size, composition of debt, fraud, resignation of executives, and the past losses of investors are important predictors for post-filing resolution. Fisher and Martel (2004) used the logistic regression analysis to predict the outcome of reorganization on the basis of variables for the structure of the reorganization proposal, financial characteristics of the firm, and some control variables. This prediction was used to measure the viability of reorganization firms.…”

“…Most studies on the area are based on financial variables only (Balcaen and Ooghe 2006). Only rarely non-financial variables are used in analyses (Laitinen 1999;Barniv et al 2002;Fisher and Martel 2004;Back 2005;Lensberg et al 2006;Laitinen 2008Laitinen , 2009.…”

“…Therefore, viability is empirically defined as the conditional probability to be a viable firm (cf. Fisher and Martel 2004). Estimation data consist of 43636 viable (non-default) and 98 non-viable firms (with no means) in 2004.…”

“…These failures impair the efficiency of the system. There are two types of measure for filtering failure (Fisher and Martel 2004). First, an ex post measure is derived using observed outcomes (statistics) for firms in procedure.…”