GOVERNANCE PATTERNS IN BANKRUPTCY REORGANIZATIONS

Recent research has suggested that effective monitoring may assist fir ms in preventing an eventual bankruptcy filing. Audit committees, boar d subgroups responsible for monitoring and evaluating the financial he alth of the firm, may exhibit varying degrees of effectiveness in moni toring firms' decline as a function of their composition. Another moni toring body which has become increasingly important in the corporate c ommunity is institutional investors. This study investigates the exten t to which audit committee composition and institutional investor hold ings are related to the incidence and nature (prepackaged plans and le ngth of time spent in reorganization) of firms' bankruptcy filings. Re sults demonstrate no association between affiliated director represent ation on audit committees or institutional holdings and the incidence of bankruptcy. These two monitoring groups are, however, associated wi th the nature of bankruptcy filing. Both audit committee composition a nd the level of institutional holdings are significantly related to a prepackaged filing and the length of time spent in reorganization duri ng the 5-year period preceding a bankruptcy filing.