The Bankruptcy Discount : Profiting at the Expense of Others in Chapter 11

This study compares the valuations of debtors emerging from Chapter 11 with the valuations of similar publicly traded firms. For each debtor in my sample, I collect valuation experts' enterprise and equity valuations that are judicially confirmed and based on managements' published financial projections. Then I compare these valuations with the valuations of similar publicly traded firms with respect to size and industry. I find that debtors' enterprise and equity valuations are systematically undervalued by 10% and 20%, respectively, relative to their peers. The greatest discounts are for debtors with the lowest valuations, the widest valuation ranges, and a 2009 emergence. Widespread discounting may be evidence that management and senior creditors use the Chapter 11 process to capture value that might otherwise flow to junior creditors