Asset Allocation in Bankruptcy

Asset Allocation in Bankruptcy

  • SHAI BERNSTEIN
  • EMANUELE COLONNELLI
  • BENJAMIN IVERSON

Article first published online: 25th October 2018 DOI: 10.1111/jofi.12740

Abstract


This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that the long‐run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users and in areas with low access to finance. These findings suggest that when search frictions are large, liquidation can lead to inefficient allocation of assets in bankruptcy.

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