Financial Distress as a Selection Mechanism: Evidence from the United States

This paper follows the process of financial distress from its onset to its resolution for a sample of 95 firms. Only about one-third of the firms survive as independent companies. A firm's short-run and long-run survival probability is positively affected by its operating performance, but its size, leverage, and debt structure complexity have no effect on its survival chances. The post-distress operating performance of the surviving firms is very close to the industry median. Filing for Chapter 11 reduces a firm's survival chances but prolongs financial distress. Overall, the evidence suggests that the U.S. financial distress environment leads to an important extent to the survival of the fittest. Chapter 11 may buy poorly performing firms some additional time, but it does not seem to allow many of them to ultimately escape the discipline of the market for corporate control.