The Relationship between Firms’ Characteristics in the Periods Prior to Bankruptcy Filing and Bankruptcy Outcome

Abstract

This study examines the association between firms' characteristics in the years prior to bankruptcy filing and bankruptcy outcome for firms filing Chapter 11 bankruptcy petitions. Our results indicate that, up to three years prior to bankruptcy filing, the characteristics of firms that liquidate differ from those of firms that reorganize. Three years prior to bankruptcy, the firms that subsequently reorganize are larger and have higher leverage than the firms that subsequently liquidate. (This relationship remains constant for all three years studied.) Two years prior to bankruptcy filing, firms that eventually reorganize are more solvent and have higher levels of discretionary accruals than firms that eventually liquidate. In the year prior to filing, firms that subsequently liquidate are more likely to have positive discretionary accruals. These findings suggest that stakeholders can predict the eventual outcome of Chapter 11 filings long before the court ruling.

Survival of financially distressed SMEs and out-of-court versus in-court reorganization: explanatory internal factors

“…In fact, although some empirical studies have found that more liquid firms are more likely to be reorganized (Routledge & Gadenne, 2000;Bryan et al, 2002;Camacho-Miñano et al, 2015;Cultrera & Bredart, 2016), others have shown the contrary relationship (Jacobs et al, 2012;Wang, 2012). Third, the solvency of firms has been positively related to firm reorganization (Bryan et al, 2002;Rose-Green & Lovata, 2013). That is, greater solvency is linked to a better capability of the firm to access new credit with which to overcome financial difficulties because creditors perceive that these loans will be repaid in time.…”

Estrutura de Capital em Empresas Brasileiras Listadas na B3 nos Anos Antecedentes ao Pedido de Falência ou Recuperação Judicial

“…Com exceção das variáveis TANG e TAM, todas as demais demonstraram diferença significativa entre os dois grupos de empresas, o que justifica a análise da estrutura de capital dessas empresas. Esses resultados corroboram com o fato de que empresas em períodos antecedentes ao pedido de falência, como alavancagem, liquidez, solvência e estrutura de capital fornecem evidências empíricas essências para os stakeholders tomarem decisões (Rose-Green & Lovata, 2013).…”

“…podem fornecer evidências empíricas essenciais para os stakeholders tomarem decisões (Rose-Green & Lovata, 2013).…”

Financial Characteristics of Distressed Firms: An Application of the Altman Algorithm Model

“…Bankruptcy is an economic event that may result in economic losses to stakeholders (Beneish & Press, ; Dawkins & Bamber, ). To prevent economic injuries, firms should be able to foresee financial distress situations promptly (Rose‐Green & Lovata, ). Unfortunately, available bankruptcy prediction models do not examine the relationship between financial distress and firm characteristics (Altman, ).…”

“…In the United States, distressed firms that want to declare bankruptcy may opt to file for Chapter 11 or Chapter 7 of the Bankruptcy Reform Act of 1978 (Rose‐Green & Lovata, ). Firms that opt to liquidate use Chapter 7 as the appropriate channel.…”