Two essays on Chapter 11 bankruptcy: Debtor-in-possession (DIP) loans and bankruptcy, and, Time in Chapter 11: A hazard rate analysis of corporate bankruptcy

This thesis is composed of two empirical studies on related issues in the process of formal bankruptcy reorganization of firms in Chapter 11. The first essay (chapter 2) is titled \u27Debtor-in-possession loans and bankruptcy\u27. The second essay (chapter 3) is titled \u27Time in chapter 11: A hazard rate analysis of corporate bankruptcy\u27. \u27Debtor-in-Possession Loans and Bankruptcy\u27 provides extensive empirical evidence on the emerging debtor-in-possession (DIP) loan market and the crucial role that post-petition financing provides in the recovery and successful implementation of plans of reorganization for Chapter 11 firms. The extensive sample includes 147 loans made to 98 firms over the period 1988 to 1995. Successfully obtaining post-petition financing provides a strong indication of probability of recovery once a firm is in formal bankruptcy and is associated with improved measures of financial liquidity, increased probability of emergence from Chapter 11, and shorter time spent in formal bankruptcy. The second essay, \u27Time in Chapter 11: A hazard rate analysis of corporate bankruptcy\u27, examines the length of time firms spend in Chapter 11. The rapid increase in Chapter 11 filings in the late 1980s and early 1990s has prompted an increased number of empirical studies of the corporate finance implications of the impact of Chapter 11 bankruptcy law. One notable feature of these studies, and the one investigated in Chapter 3 of this thesis, is the great variability in the time firms spend under bankruptcy court supervision. The estimates from prior papers for the average time spent under court protection from creditors range from 3.3 months to 44 months. Chapter 3 contributes to the empirical literature on financial distress by providing improved estimates on the time spent in Chapter 11. It does so in two ways: by providing a significantly larger, more comprehensive sample of public firms under Chapter 11 since 1978, thereby reducing the standard error of the estimated mean time under Chapter 11, and more importantly, by providing unconditional estimates of time spent under Chapter 11