Dr Edith Hotchkiss, Carroll School of Management, Boston College
The use of M&A in bankruptcy has increased dramatically, leading to concerns that Chapter 11 leads to excessive liquidation of viable firms. In this paper, we argue that the rise of M&A has blurred traditional distinctions between “reorganisation” and “liquidation”. We examine the
drivers of M&A activity, based on factors specific to Chapter 11 as well as more general factors that drive M&A waves for non-distressed firms. M&A in bankruptcy is counter-cyclical, and is more likely when the costs of financing a reorganisation are greater than financing costs
to a potential acquirer. Consistent with a senior creditor liquidation bias, the greater use of secured debt leads to more sales in bankruptcy – but, this result holds only for sales that preserve going concern value. We also show that overall creditor recovery rates are higher, and
unsecured creditor recoveries and post-bankruptcy survival rates are not different, when bankrupt firms sell businesses as going concerns.