Abstract
Financial analyses such as valuation, solvency and capital adequacy play a crucial role in bankruptcy. Over the course of the 20th century, methods of financial analysis in bankruptcy have shifted from earnings multiples to discounted cash flow (DCF) and recently to market-based approaches such as auctions, market pricing of equity and unsecured debt, and credit spreads. Each shift in bankruptcy court practice followed shifts in financial services industry practice and developments in academic finance. Bankruptcy courts shifted gradually, often several decades after the financial community. Newer methods encountered resistance and skepticism, and older methods continued to be used by courts in conjunction with newer methods for many years. The overall pattern reflects a movement toward greater financial and quantitative sophistication by bankruptcy courts and practitioners and seems to be driven by a desire for greater accuracy and objectivity.
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