Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 7Bankruptcy Outcomes
A key goal of Chapter 11 is to provide economically viable firms an opportunity to reorganize, while liquidating those that are not viable. There has been considerable debate as to whether the current bankruptcy code strikes the right balance between reorganization and liquidation, or whether it is biased toward allowing inefficient firms to reorganize. The number of failures following Chapter 11, as seen in the significant number of Chapter 22 filings, might be taken as evidence of a problem with the structure of Chapter 11. At the same time, we have seen some spectacular success stories upon emergence from bankruptcy, at least from the perspective of equity holders in the reorganized company. For example, Kmart's common stock traded at under $14 per share when the firm emerged from Chapter 11 in May 2003, with 53% of its shares owned by ESL Investments. The stock rose more than seven times to over $100 per share by November 2004, when its merger with Sears was announced (the longer term fate of the merged company was, of course, less stellar, leading to its bankruptcy filing in 2018). Six Flags emerged from Chapter 11 in 2010, with its stock trading at less than $10 per share; as the firm underwent a successful operational restructuring, the stock price approximately doubled in the first postbankruptcy year and continued to increase thereafter.
There are several ways in which one might evaluate the success of Chapter 11. The simplest measure of ...