'Warm with Sunny Skies': Disclosure Statement Forecasts

Abstract

This Article examines the quality of forecasts in bankruptcy disclosure statements. Required by the Bankruptcy Code, disclosure statements seek to provide creditors with adequate information to cast an informed vote on a chapter 11 plan of reorganization. In addition, disclosure statements are theoretically important devices to narrow some of the information asymmetries that a bankruptcy proceeding exacerbates. We find that chapter 11 debtors forecast postbankruptcy business earnings capability with significant error and that bankruptcy disclosure statements are systematically over-optimistic in their forecasts of postbankruptcy performance. Furthermore, we find negative relations between the forecast error and the size of the firm as well as the firm's capital intensity. We do not find significant relationships between forecast error and changes in corporate governance, at either the CEO or board level.