Essays on Chapter 11 bankruptcy restructuring and financial and economic distress

This dissertation consists of three essays on Chapter 11 bankruptcy restructuring and financial and economic distress. The first essay develops straightforward proxies to identify firms in financial versus economic distress and shows that Chapter 11 outcomes and asset redeployments vary according to these firm types. These results are consistent with Chapter 11 preserving the going concern value of financially distressed firms while redeploying the assets of economically distressed firms. The results also run counter to concerns that inefficiencies and conflicts of interest severely compromise the Chapter 11 process. This essay also provides the first empirical evidence that the put option inherent in lease contracts is frequently exercised in Chapter 11, that the disposition of lease contracts in bankruptcy constitutes a large portion of asset restructurings, and that the ability to put lease contracts may mitigate the indirect costs of asset fire sales.;The third essay provides the first firm-level evidence of which we are aware on the effects of labor unions on bankruptcy restructuring. Unionized firms filing for Chapter 11 appear healthier than their nonunionized counterparts prior to filing. Unionized firms also experience fewer employee reductions and make smaller changes to their investment policy in Chapter 11 than do nonunionized firms. On the whole, however, our evidence does not strongly support the notion that unionized firms use Chapter 11 in a strategic manner to break labor contracts.;The second essay studies the path to bankruptcy taken by firms identified as financially distressed, economically distressed, or mixed distress. The analysis finds significant differences in leverage and operating performance between financially distressed and economically distressed firms even when looking back five years prior to their bankruptcy filings. Furthermore, the response to distress differs between the financially and economically distressed firms. On the road to bankruptcy, economically distressed firms deplete considerable cash holdings, engage in large asset increases, and incur large increases in debt, all while having operating performance significantly below their industry medians. Conversely, financially distressed firms maintain steady cash balances, reduce assets, and incur relatively few additional liabilities in the years prior to bankruptcy. Financially distressed firms also exhibit above-industry median operating performance in all five years prior to Chapter 11 and exhibit no performance decline relative to industry peers.