Value Destruction in the New Era of Chapter 11

Over the past two decades, control over the US bankruptcy reorganization process has shifted from a debtor's pre-bankruptcy managers to holders of secured claims. The result has been increased adherence to absolute priority and a harder landing for the debtor's managers and shareholders. Because managers still make or can influence the decision whether or when to file a bankruptcy petition, we hypothesize that anticipation of bankruptcy under these new conditions will result in a delay in filing, increased leverage, increased secured debt, and a reduction of asset value for firms at the time they file. We present empirical evidence consistent with our hypotheses.