The Relationship between Firms’ Characteristics in the Periods Prior to Bankruptcy Filing and Bankruptcy Outcome

This study examines the association between firms’ characteristics in the years prior to bankruptcy filing and bankruptcy outcome for firms filing Chapter 11 bankruptcy petitions. Our results indicate that, up to three years prior to bankruptcy filing, the characteristics of firms that liquidate differ from those of firms that reorganize. Three years prior to bankruptcy, the firms that subsequently reorganize are larger and have higher leverage than the firms that subsequently liquidate. (This relationship remains constant for all three years studied.) Two years prior to bankruptcy filing, firms that eventually reorganize are more solvent and have higher levels of discretionary accruals than firms that eventually liquidate. In the year prior to filing, firms that subsequently liquidate are more likely to have positive discretionary accruals. These findings suggest that stakeholders can predict the eventual outcome of Chapter 11 filings long before the court ruling.