On Direct Bankruptcy Costs and the Firm's Bankruptcy Decision

Abstract

Using firm-level information on 622 commercial bankruptcies filed under Canadian law (324 liquidating firms and 298 reorganizing firms) and controlling for a variety of firm-specific factors, we find there is no difference in direct bankruptcy costs between liquidation and reorganization. We argue that if bankruptcy costs do have an impact on a firm's bankruptcy decision, it can only be through differences in indirect bankruptcy costs.