Continuation bias, delay, and CEO turnover in corporate reorganization.

Abstract

This dissertation analyzes three issues regarding corporate reorganization under Chapter 11 of the U.S. Bankruptcy Code: continuation bias, delay, and CEO turnover. The first Chapter of this dissertation investigates if firms with larger number of employees are more likely to avoid liquidation and reorganize instead. Using detailed information on the outcomes and characteristics of two hundred and eleven corporations that filed for reorganization in the U.S., I find that bankrupt firms with 50% more employees are about 5% more likely to succeed in reorganization. One implication is that the corporate reorganization practice is consistent with the lawmakers' original intention to save jobs of financially challenged firms. Another implication is that claimholders may find it more costly to liquidate those firms with more workers. Corporate reorganizations in the U.S. are also characterized by lengthy negotiations, during which the managers and creditors of a bankrupt firm bargain over how to distribute shares of the newly reorganized company. The second Chapter of this dissertation investigates the hypothesis that information asymmetry, as well as usual transaction costs, can be a determining factor of the length of negotiation. Based on sequential bargaining models, I develop and run empirical tests to examine whose private information is responsible for the holdup. Using detailed information on the bargaining outcomes and processes of more than two hundred firms under Chapter 11, I show that the delay stems from managers' ignorance of creditors' bargaining power, rather than from creditors' lack of knowledge concerning managers' type. The second Chapter also provides implications for bankruptcy law and policy. First, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, through its impact on the bargaining rule, may increase creditors' debt recovery rate and decrease the length of corporate reorganization in general. This may lower the deadweight loss from bankruptcy, at the cost of debtors' payoffs. Second, corporate reorganization outcome is affected by monetary policy, such that the length of reorganization period decreases by 1.2 months and debtor firm's payoff increases by 6.8% with an increase of 1% in prime rate. The third Chapter primarily investigates whether CEOs of financially distressed firms are more likely to be replaced once the firm files for corporate reorganization in the U.S. Analyses of a panel dataset with 285 firm-years suggest that CEO turnover likelihood is unaffected when filing for corporate reorganization under Chapter 11 of the U.S. Bankruptcy Code. The main implication is that CEOs of financially distressed firms have no personal incentives to avoid bankruptcy filing. Another implication is that CEOs in the U.S. have less personal incentives to prevent bankruptcy by reducing company risks compared to CEOs in a country where they are replaced upon bankruptcy.