The Role of Bankruptcy Legislation for Survival of a Company: Real Options Approach

Abstract

The goal of the research is to determine whether the existence of the reorganization mechanism for insolvent businesses, namely Chapter 11, really creates benefits as significant as it is assumed to create. To achieve this goal, the following objectives were set: to investigate the Chapter 11 mechanism and its analogues in the world and present the existing views on the reorganization procedure, to examine the process of bankruptcy and/or debt restructuring in three companies (WorldCom, Kmart, RUSAL) and to identify the benefits and losses caused by chosen reorganization/restructuring mechanism, to examine the effects of bankruptcy with and without Chapter 11, using simulation modeling. The results of the research suggest that Chapter 11 is a valuable real option for companies, independent from the industry, where they operate, or from their individual characteristics. Simulation modeling also proves that Chapter 11 contributes to value preservation and also shows superiority of asset sales, compared to costs reduction as a reorganization mechanism.