Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics

Abstract In this article, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two options: Chapter 7 liquidation 11 reorganization. Using Compustat data, first document capital structure investment non-bankrupt, 11, firms. those data moments, then estimate parameters a general equilibrium dynamics model with endogenous entry exit include both options. Finally, evaluate policy change similar one recommended by American Bankruptcy Institute that amounts “fresh start” bankrupt We find changes can sizable consequences borrowing costs which via selection productivity, as well long run welfare.