LIQUIDATION COSTS AND CAPITAL STRUCTURE

We investigate the relation between liquidation costs of assets and co mposition of capital structure for firms that reorganized under Chapte r 11 of the Bankruptcy Code. Firms with high liquidation costs emerge from Chapter 11 with relatively low debt ratios. The debt of these fir ms is more likely to be public and unsecured, and to have less restric tive covenant terms; these firms are also more likely to raise new equ ity capital. Assets with high liquidation costs thus lead firms to cho ose capital structures that make financial distress less likely.