AN INVESTIGATION OF THE DIRECT COSTS OF BANKRUPTCY REORGANIZATION FORCLOSELY HELD FIRMS

By analyzing 36 closely held corporations that successfully reorganize d under Chapter 11 of the Federal Bankruptcy Code, this article presen ts empirical evidence of the direct administrative costs of bankruptcy reorganization. Using two applications of least squares regression an alysis, direct bankruptcy costs are associated with firm size and the time spent in bankruptcy. The results provide strong evidence that dir ect Chapter 11 administrative costs are not trivial for small business es and that there are substantial scale economies in these costs. Dire ct bankruptcy costs averaged 8.5 percent of the book value of total as sets at the bankruptcy filing date. Total asset values net of addition al investments and distributions declined on average 30 percent during the Chapter 11 proceedings. These results have implications for the c ontinuing debate over whether the Chapter 11 process contributes to th e high failure rate among small businesses in the United States.