Impact of professional fees on performance of firms undergoing reorganisation in Chapter 11

Abstract

There has been wide spread belief in finance and legal literature and popular press that costs related to reorganisation under bankruptcy mechanism are excessive. Using a sample of 76 firms that filed for bankruptcies under Chapter 11 between January 1999 and December 2003, this paper examines the impact of direct costs on firm performance over the Chapter 11 period. Our sample firms have median direct costs equal to 2.83% of the firms’ pre-filing sales, similar to the direct costs reported in other studies. Consistent with our hypothesis that professionals employed by bankrupt firms help to make these firms better operational decisions, we find professional fees to be positively related to improvement in firm performance. We also observe negative relationships between changes in firm performance and time spent in Chapter 11 as well as utilisation of pre-pack mode of bankruptcy.