The effect of discretionary actions on small firms' ability to survive Chapter 11 bankruptcy

This paper analyzes whether judges' actions within Chapter 11 bankrupty affect debtor firms' ability to reorganize (e.g., debt restructurings and mergers) as opposed to being liquidated in Chapter 7 bankruptcy. Our main finding is that debtor firms' control of the process, e.g., the exclusivity period, affects their ability to restructure debt. A reduction in the exclusivity period decreases the likelihood of reorganization, but increases the likelihood of deviation from absolute priority when plans of reorganization are agreed upon. An extension of the exclusivity period, however, does not increase the likelihood of either reorganization or deviation from absolute priority. (C) 2002 Elsevier Science B.V. All rights reserved.