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Weighing the pros and cons of Chapter 11
 Assistant Professor of Finance
Rajeev Singhal makes a simple comparison.
Companies, like people, sometimes get sick.
“If you make an analogy, Chapter 11 bankruptcy is like a hospital,” he says. “If
you are ill, you go to the hospital and hopefully you come out well. If a
company is ill, it goes into Chapter 11 and hopefully it comes out well.”
Singhal’s small office on the fourth floor of Elliott Hall is cluttered with
papers and files, the mark of a busy man. But his mind is fastidious,
particularly when it comes to how companies that fall into hard times can
rebound.
The paper he and a colleague have been working on for nearly five years, Is
Chapter 11 costly?, has been accepted by the Journal of Financial Economics and
will be published this winter.
The thesis of the paper is that Chapter 11 bankruptcy is far from being what it
is commonly perceived to be – a corporate death knell. Instead his research
indicates that there are real advantages. For example, companies in Chapter 11
often are able to obtain financing to infuse them with the cash they need to get
over the hump.
And Chapter 11 usually often means a change in management.
“There are lots of theories behind how a change in management can improve the
performance of a company,” Singhal says. “So there are five or six benefits that
can come to a company when it files for Chapter 11.”
And just as people should not purposely get sick, companies should not purposely
go bankrupt. But when it happens, Chapter 11, like a good hospital, can help.
“We’re not saying that there are no costs, only that there are costs and
benefits. In my research I find that benefits are often more than costs.”
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