Bankruptcy

Live-Blogging the Big-Bankruptcy Empirical Research Agenda: Nothing Succeeds Like Success

By Jonathan Lipson

UCLA Law Professor Lynn LoPucki has graciously agreed to permit me to live-blog the Big-Bankruptcy Empirical Research Agenda conference he has organized today at UCLA.  

For those few who don't know, the Bankruptcy Research Database is one of the most important tools available to scholars and practitioners interested in understanding patterns in  chapter 11 cases.  It captures a great deal of information about essentially every large public company that has commenced a chapter 11 case under the current Bankruptcy Code.

The holy grail of all bankruptcy scholarship is figuring out whether a case was successful.  Conventional wisdom might say that confirming a chapter 11 plan?and paying the professionals in full?is good enough. 

But, we know that many companies file again, despite having confirmed a plan, and that may not necessarily be evidence that the plan was a failure:  circumstances change, etc.  Conversely, the confirmed plan may, in hindsight, prove much worse than other possible deals: Perhaps a 363 sale would have produced greater recoveries for creditors.  

As Ken Klee observed, yet another issue involves what we can think of as ?soft? indicia of success:  Has the reorganization preserved jobs and going concern values?  Although we often forget this, this was at least one of Congress? basic policy goals in developing Chapter 11 in the first place.

LoPucki has proposed a model that would help researchers make their own decisions:  

We believe scholars can answer all these questions empirically, using a model composed of three variable sets. The first set consists of several alternative measures of success (Success). They include plan confirmation, business survival, job survival, post- bankruptcy profitability, the recurrence or non-recurrence of financial distress, and creditor and shareholder recoveries. The Success variables are the dependent variables in the model. The second set consists of several measures of case difficulty (the Problem). They include debt, revenue, and income ratios, measures of the nature of the debtor?s business, and measures of the economic climate. The third set consists of measures of the procedures employed (the Procedures). They include such things as examiners, trustees, 363 sales, DIP lending, prenegotiation, claims trading, etc.

The virtue of this approach is that it does not force researchers to quibble with an ex ante claim of what constitutes success.  Rather, it seems, the goal is to create a menu of possible definitions of success and to permit researchers to decide what factors make that more or less likely.

As with all empirical research, of course, this is not perfect.  As I hope to observe in a subsequent post, choices about what data to collect to make this possible must still be made, and those choices are difficult.  Defining success, in short, is about more than identifying failure.

Full post as published by Credit Slips on February 11, 2011 (boomark / email).