Assessing Post-Bankruptcy Performance: An Analysis of Reorganized Firms' Cash Flows

Abstract

We analyze the postbankruptcy cash flows for a sample of firms that emerged from Chapter 11 reorganization between 1983 and 1993. We evaluate the rate of return available to investors who owned all of the debt and equity claims on the firm as it emerged from bankruptcy. On average, this return matches the performance of benchmark portfolios during the five years following emergence. Although postbankruptcy operating margins are poor, the market appears to accurately assess the firm's prospects at the time it emerges from bankruptcy. Superior returns are generated by high growth-option firms that invest heavily following emergence from bankruptcy.