ASSET EFFICIENCY AND REALLOCATION DECISIONS OF BANKRUPT FIRMS

This paper investigates whether Chapter 11 bankruptcy provides a mecha nism by which insolvent firms are efficiently reorganized and the asse ts of unproductive firms are effectively redeployed. We argue that inc entives to reorganize depend on the level of demand and industry condi tions. Using plant-level data, me find that Chapter 11 status is much less important than industry conditions in explaining the productivity , asset sales, and closure conditions of Chapter 11 bankrupt firms. Th is suggests that firms that elect to enter into Chapter 11 incur few r eal economic costs.