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Real options and strategic bankruptcy

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  • Kang, Tong Hyouk
  • James, Sharon D.
  • Fabian, Frances

Abstract

Understanding whether and when Chapter 11 bankruptcy provides a real option for resolving operational uncertainty is essential for financially-distressed firms seeking to restructure and continue operating as a going concern. The corporate restructuring literature has centered on the operational and strategic actions firms undertake to improve their competitive position and performance prospects. While it is well understood that Chapter 11 bankruptcy is an efficient mechanism for restructuring assets and debt, it also offers an additional benefit seldom discussed in the literature: a real flexibility option that can help firms to resolve operational uncertainty. This paper develops theoretical predictions about when a “strategic” bankruptcy will facilitate a firm’s emergence from bankruptcy and ability to continue operating as an independent entity. We test hypotheses on a sample of 916 bankrupt firms during the period 1980–2014. The results are consistent with our predictions.

Suggested Citation

  • Kang, Tong Hyouk & James, Sharon D. & Fabian, Frances, 2020. "Real options and strategic bankruptcy," Journal of Business Research, Elsevier, vol. 117(C), pages 152-162.
    • Handle: RePEc:eee:jbrese:v:117:y:2020:i:c:p:152-162
    DOI: 10.1016/j.jbusres.2020.05.057
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    2. Annabi, Amira & Breton, Michèle & François, Pascal, 2021. "Could Chapter 11 redeem itself? Wealth and welfare effects of the redemption option," International Review of Law and Economics, Elsevier, vol. 67(C).

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