Study reveals how companies use bankruptcy to restructure finances
The researchers developed a model that predicts the likelihood of bankruptcy emerging or ending based on factors such as business, judicial and macroeconomic characteristics.
Corporate bankruptcy, often seen as a moment of crisis, can reveal sophisticated strategies to keep companies operating with debt relief. In the context of Chapter 11 under the US Federal Bankruptcy Code, some organizations use the legislation as a strategic tool. In this way, they exploit loopholes to reduce financial burdens and preserve their operations. This study, published in Abacus Magazine by André De Moura (FGV EAESP), Jairaj Gupta and Maria Barzotto, analyzes how and why companies act in this way, with implications for creditors, regulators and public policy.
The research used data from the UCLA-LoPucki Bankruptcy Research Database (BRD) and the Compustat financial database. With data from more than 500 bankruptcy filings and almost 400 successful judicial reorganizations between 1994 and 2019, the researchers built a predictive model on the survival of companies in bankruptcy. Some of the factors analyzed include leverage, governance, judicial context and macroeconomic conditions.
Strategic bankruptcy: how companies restructure debts in a planned way
The results indicate that companies begin to adjust their debt structure one to four years before filing for bankruptcy. Therefore, they assume an anticipatory and strategic behavior in scenarios of financial difficulties. The strategy of increasing leverage allows companies to use the judicial system to reorganize their finances, shifting the burden onto creditors.
The research identified ten key variables for successful bankruptcy filings, such as the experience of the judge and the replacement of the CEO after the bankruptcy filing. Surprisingly, high levels of leverage were associated with higher chances of emergence, while the retail sector showed a lower probability of success.
In addition, the results suggest the need to reform bankruptcy laws to limit strategic abuse. Proposals include restricting access to certain legal provisions, increasing costs for entry into the judicial system and requiring stricter repayment plans.
This behavior not only affects creditors, but also challenges the traditional perception that bankruptcy results exclusively from financial difficulties. Therefore, regulators and courts need to balance the incentive for business continuity with the protection of creditors' rights.
Thus, the study by Gupta, Barzotto and De Moura reveals that bankruptcy, far from being just a sign of corporate misery, can be a carefully planned strategic tool. Therefore, reforms to the bankruptcy system are essential to mitigate abuse and ensure greater fairness between companies and creditors.
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