Abstract
Using a sample of 352 completed Chapter 11 reorganizations, we find that shortly before they file Chapter 11, the reorganized firms have higher debt ratios, especially short-term debt ratios, than their industry peers. While short-term debt decreases substantially during the reorganizations, long-term debt ratios remain comparatively high immediately after emergence. Cross-sectional regressions suggest that debt ratios are more in line with the predictions of the static-tradeoff theory after Chapter 11 reorganizations, but they also reveal that pre-reorganization debt ratios affect post-reorganization debt ratios. Collectively, the evidence supports the notion that Chapter 11 allows for significant capital structure adjustments, yet the resulting capital structures do not appear to be set completely from scratch. We also find that firms with the most short-term debt upon filing are the ones that emerge the fastest, suggesting that it is quicker to remedy financial distress than economic distress.
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