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Bankruptcy as a deliberate strategy: Theoretical considerations and empirical evidence
Author(s) -
Moulton Wilbur N.,
Thomas Howard
Publication year - 1993
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.4250140204
Subject(s) - bankruptcy , financial distress , empirical evidence , value (mathematics) , economics , business , empirical research , going concern , stakeholder , actuarial science , accounting , finance , financial system , management , philosophy , audit , epistemology , machine learning , computer science , auditor's report
Bankruptcy and bankruptcy reorganizations have been identified as remedies for financial distress, but there is little agreement on their value to firms, managers, and the general economy. This paper provides a brief review of proposed bankruptcy strategies and some alternative views about their costs and benefits followed by an empirical study of the outcomes of 73 bankruptcies and subsequent reorganization efforts. The evidence suggests that there are few successful reorganizations, bankruptcy is a costly response to financial distress, and managerial choice in bankrupt firms is highly constrained by forces external to the firm. The diversity of stakeholder interests limits the value of global judgements about success or failure of bankruptcy strategies. Firm size dominates all other factors in predicting success in completing the reorganization process. Delayed filings primarily reflect failed efforts to avoid bankruptcy, not deliberate strategies. Reasons for the use of bankruptcy in spite of its high costs are discussed.