Assessing Post-Bankruptcy Performance: An Analysis of Reorganized Firms' Cash Flows

Michael J. Alderson · Brian L. Betker

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

Abstract

We analyze the postbankruptcy cash flows for a sample of firms that emerged from Chapter 11 reorganization between 1983 and 1993. We evaluate the rate of return available to investors who owned all of the debt and equity claims on the firm as it emerged from bankruptcy. On average, this return matches the performance of benchmark portfolios during the five years following emergence. Although postbankruptcy operating margins are poor, the market appears to accurately assess the firm's prospects at the time it emerges from bankruptcy. Superior returns are generated by high growth-option firms that invest heavily following emergence from bankruptcy.

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References

1977Determinants of corporate borrowing 1992Liquidation Values and Debt Capacity: A Market Equilibrium Approach 1999Improved Methods for Tests of Long‐Run Abnormal Stock Returns 1994Financial Distress and Corporate Performance 1990Capital Structure and the Informational Role of Debt 1997How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed 1990Troubled debt restructurings 1992Contagion and competitive intra-industry effects of bankruptcy announcements

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2003The efficacy of liquidation and bankruptcy prediction models for assessing going concern 2009Survival of the Fittest? Financial and Economic Distress and Restructuring Outcomes in Chapter 11 2002Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions 2009Post‐Chapter 11 Bankruptcy Performance: Avoiding Chapter 22 2003To File Or Not To File? Systemic Incentives, Corporate Control, and the Bankruptcy Decision

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