INNOVATION AND CHAPTER 11 BANKRUPTCY OUTCOME

Abstract

The purpose of this thesis is to explore the relationship between a firm’s innovation and Chapter 11 bankruptcy outcome. Innovation is measured as R&D expenditure, the number of patents and the number of citations to capture both input and output of a firm’s innovative activity. We find no significant relationship between innovation and bankruptcy outcome when we relate recent innovation to bankruptcy outcome. However, the relationship between innovation and bankruptcy outcome becomes significant when we consider the entire accumulated innovation prior to the bankruptcy, indicating older patents matter more in bankruptcy. We demonstrate that firms investing more in R&D expenditure and generating a higher number of patents before bankruptcy are more likely to reorganize than be liquidated or acquired. On the other hand, bankrupt firms with highly cited patents are more likely to be acquired than reorganize. Similar to other studies, our empirical results show that larger, more levered and liquid firms are positively associated with successful reorganizations. Finally, firms that file for prepackaged Chapter 11 bankruptcy and receive debtor-in-possession (DIP) financing during bankruptcy are more likely to reorganize than liquidate or be acquired. Firms file for bankruptcy during the 2008 economic crisis are prone to liquidation. Industry factor only matters for firms in the manufacturing industry, where firms with more innovation are more likely to reorganize than liquidated.