Gibson D. Lewis Center for Business and Economic Development

BEAUTIFULLY BROKEN BENCHES: A TYPOLOGY OF STRATEGIC BANKRUPTCIES AND THE OPPORTUNITIES FOR POSITIVE SHAREHOLDER RETURNS

Jerry Paul Sheppard
Simon Fraser University
Burnaby, British Columbia

Note
Special thanks to Sharon Sheppard, Rocky and Rose Sheppard, Elaine Fairly, Mahamad Dhanani, Mark Wexler, Jean Last, Ann Winton and two anonymous reviewers for their assistance in this research. The author, however, assumes responsibility for all errors, omissions, etc.

Abstract

Merchants in medieval Venice who failed to pay their debts were closed bybanca rotta -- the breaking of the bench from which they did their business. In some cases today, bankruptcy is seen as a beautiful strategic maneuver. While there are currently some positive aspects which can be attributed to filing for bankruptcy, there is still debate as to its merits as a strategy. To allow for a more detailed understanding of the strategic bankruptcy concept, the author defines, identifies and categorizes types of bankruptcies. To address the issue of whether bankruptcy is a worthwhile strategy the author also presents a study of the effectiveness of bankruptcy in advancing long-run shareholder wealth. A sample of 155 bankruptcies was employed to study the impact of various strategies on returns to shareholders. Some types of strategies were found to result in significantly greater returns than average.

Introduction

If merchants in medieval Venice failed to pay their debts, creditors closed their operation by breaking the bench from which they did all their business. Italian for "broken bench", banca rotta, is the word from which bankrupt is derived (Cifelli, 1983). While the bankrupt party in medieval Venice saw their place of business go from commerce to kindling in moments, the situation in the United States today is different. A business' "broken bench" is not seen as a stack of splintered wood, but as a beautiful work of art. Bankruptcy, or, to be more accurate, Chapter 11 reorganization, has been viewed as a business strategy that can help turn an ailing company around. Like opera, if well performed, the Chapter 11 strategy can be a beautiful thing to behold: the corporation, assaulted by its creditors, is rescued from certain death and brought back to health by the wise ministrations of the court (Sheppard, 1992).

Like opera in Italy, Chapter 11 is certainly popular in the U.S. Over 60,000 filings and a total of $82.7 billion in assets wound up in the U.S. bankruptcy courts in 1990 (Duncan, 1991; Sherman, 1991). While there are potentially many desirable aspects one can attribute to filing for Chapter 11 (e.g. see Sheppard, 1992), there is disagreement as to the merits of strategically filing for bankruptcy (Flynn & Faird, 1991; Moulton & Thomas, 1993; Sirower, 1991). Furthermore, there is disagreement as to how strategic bankruptcy should be defined (Delaney, 1992; Flynn & Faird, 1991; Moulton & Thomas, 1993).

For an intelligent discourse, a clear definition and conceptualization of strategic bankruptcy -- as differentiated from non-strategic bankruptcy -- are needed. It would also help to have some parameters within this conceptualization that help identify various types of strategic bankruptcies. This would allow one the weighing of possible merits and problems involved with each type of strategy. Thus, in this paper four questions will be addressed. One, what is strategic bankruptcy? A clearer definition and conceptualization of strategic bankruptcy will be introduced in the sections to follow. Two, how can one identify and categorize strategic bankruptcies? By being able to identify and categorize strategic bankruptcies, an improved understanding of the phenomenon can developed. Three, are certain types of bankruptcies effective in advancing the long run wealth of a company's shareholders? There may be situations where filing for bankruptcy might aid investor returns. This leads to the final question. What other conditions aid investor returns in situations where the firm files Chapter 11? Some understanding of circumstances which might make strategic bankruptcy a viable alternative can be achieved by answering this final question.

Sirower (1991) demonstrated that firms which were about to go bankrupt steadily lost value for shareholders in the year prior to the firm's filing date, and such firms steadily gained value for shareholders in the year after the Chapter 11 filing. Therefore, the strategic goal of optimizing long-run shareholder value (Hax & Majluf, 1984) could support a bankruptcy filing. On the other hand, Moulton & Thomas (1993) found little evidence to support the idea that a strategic bankruptcy was useful in optimizing long-run shareholder wealth.

This idea that a bankruptcy filing could promote shareholder wealth gave rise to the phrase strategic bankruptcy (e.g. see Cifelli, 1983). However, if the only requirement defining a strategic bankruptcy is that shareholders might benefit, then all bankruptcies can be viewed as strategic. This would render the phrase redundant, and therefore useless. Thus, if the phrase is to have any real meaning one needs to ask "what is strategic bankruptcy?"

What Is Strategic Bankruptcy?

According to Moulton & Thomas (1993) and Delaney (1992), strategic bankruptcy implies two things. First, a petition under Chapter 11 of the U.S. bankruptcy code is initiated by one stakeholder at the expense of others. Second, strategic bankruptcies are invoked to deal with a single problem (e.g. a lawsuit or class of lawsuits). By this logic, all bankruptcies are strategic (Moulton & Thomas, 1993). There is some validity to this perspective. The competitive nature of the asset recovery game for creditors may create a situation where some stakeholders are favored at the expense of others. Also, the law gives some stakeholders priority over others in all bankruptcy proceedings (Brown, 1989). Finally, the need to file for bankruptcy, in the end, often appears to result from a single problem (e.g. cash flow problems, equity insolvency, creditor petitions).

However, the "all bankruptcies are strategic" perspective is not a very useful one. If all bankruptcies are strategic, then why would authors like Delaney (1992) focus only on specific filings (e.g. Texaco)? This perspective also does not tell us much about any variation which might occur within the realm of strategic bankruptcy. Given the wide variation in stakeholder groups that may be concerned with one bankruptcy as opposed to those that are concerned with another there should be different types of strategic bankruptcies.

Why are some bankruptcies labeled "strategic" and others not? A more straightforward definition of strategy may help distinguish between the two types of bankruptcy. Mintzberg (1991) gives five definitions of strategy: a plan, a ploy, a pattern, a position, and a perspective. Regarding these definitions, Sheppard (1992) has noted, Chapter 11 does not qualify as a strategy in most respects.

Bankruptcy, however, may fit two of Mintzberg's definitions of strategy: a plan and a ploy. As a plan, the strategic bankruptcy must be a "consciously intended course of action, a guideline (or set of guidelines) to deal with a situation" (Mintzberg, 1991: 12). In the case of strategic bankruptcy, the plan must deal with a specific stakeholder threat. As a ploy, the strategic bankruptcy must be a "specific 'maneuver' intended to outwit an opponent or competitor¹ (Mintzberg, 1991: 13)." Daily (1994: 269), referring to earlier work by Delaney (1992) and Flynn & Faird (1991), states that the strategic bankruptcy can be defined as "a proactive attempt by firms management to contend with some threat posed by a stakeholder group." Delaney (1992), also notes that, in cases of strategic bankruptcy, there is an intention to promote some group of stakeholders at the expense of others.

To identify the strategic bankruptcy, one needs to go beyond the items Moulton & Thomas (1993) and Delaney (1992) mention: that a petition is initiated by one stakeholder at the expense of others and the filing is invoked to deal with a single problem. A strategic bankruptcy must also be one in which the firm is attempting to use Chapter 11 as a ploy or a plan (Mintzberg, 1991) in a proactive fashion (Daily, 1994) to deal with some threat posed by an identifiable stakeholder group.

What Is A Non-Strategic Bankruptcy?

If one can identify strategic bankruptcies, then one must surely be able to spot non-strategic bankruptcies. Non-strategic bankruptcies may possess some of the attributes of strategic bankruptcies. Thus, differentiating one from the other may be difficult. For example, both strategic and non-strategic bankruptcies greatly impact a single identifiable stakeholder. However, with non-strategic failures the impacted parties are usually commercial or financial creditors (e.g. suppliers or lenders, respectively). In these non-strategic cases, the debtor company seeks to obtain a straight-forward stay against the action of creditors.

As shall be seen, strategic failures typically, although not always, impact groups other than creditors. This means is that one can file a strategic Chapter 11 which targets creditors, but the objective of the filing must appear to go beyond a simple stay. In other words, to be defined as a strategic bankruptcy which targets creditors, there must be some evidence that the filing was part of a plan that the firm's managers were unable to execute pre-petition, and that the filing was being used as a ploy to force the support of creditors².

Table 1 about here.

Given the definition for strategic bankruptcy included in the above section, several subtle differences between the strategic and non-strategic filings can be noted. These differences are summarized in Table 1. In general, non-strategic bankruptcy deals with debts incurred in the normal course of business -- e.g. debts owed to suppliers and lenders -- and the Chapter 11 filing simply seeks to stay the creditor's actions until the firm can develop a plan for reorganization. For example, when Pettibone Corp. found itself overburdened with debt from a downturn in the construction industry, it went into Chapter 11 in order to devise a plan that would raise equity and return the company to solvency. This is different from strategic bankruptcies, which attempt to address obligations or problems that either: (1) do not deal with these traditional creditors, or (2) deal with these creditors in ways which were not previously contemplated³.

A Simple Typology Of Bankruptcies

To uncover distinctions between types of Chapter 11 filings, a typology of bankruptcies is developed and presented here. Typologies are typically employed to provide guidance in early exploratory work (Harrigan, 1983). Early strategy research provides numerous examples of such exploratory typologies (Miles & Snow, 1978; Miller & Friesen, 1980; Rumelt, 1974). Since one of the purposes of the present study is to explore the concept of strategic bankruptcy, the use of a typology is warranted.

For a bankruptcy to be strategic, it must be targeted at a stakeholder, and be for a specific purpose. Thus, to identify strategic bankruptcies one would need to identify which stakeholders the firm was attempting to "outwit" and what specific action the firm was attempting to "thwart." Take the example of A. H. Robins. In that case, the firm intended to outwit plaintiffs of the Dalkon shield lawsuits in order to thwart their legal claims against the company. Again, strategic bankruptcy was not the simple avoidance of general creditors but something very specific.

The Sample and Operationalization

To create a bankruptcy typology, a sample of 155 companies that entered Chapter 11 between October, 1979 (when the current bankruptcy law took effect) and December, 1987 was employed. The list of failed firms was gathered by scanning Commerce Clearinghouse's Capital Changes Reporter for companies which declared bankruptcy during the period. Moody's manuals were employed to ensure that start-up firms (those with less than 100 employees and in existence less than five years) were eliminated. Such firms are particularly susceptible to the ills of autocratic leadership that Argenti (1976) finds critical to firm survival. These start-up firms are also impacted by the liability of newness (Singh & Lumsden, 1990). Heavy industry regulation or a change in the level of industry regulation would be an added factor affecting the likelihood of firm failure (Owen & Brautigam, 1980). Thus, firms in heavily regulated or recently deregulated industries were also eliminated. Firms primarily involved in the industries of transportation, telecommunications, utilities, banking, insurance, medical practice, and legal practice (SIC Code Groups 40-42, 44, 48- 49, 60, 63-64 and 80-81) were thus eliminated. Because the rational behind the Chapter 11 filings for start-ups and heavily regulated or recently deregulated firms could be attributed to non-strategic reasons, these firms were eliminated from the sample.

Business press reports about the bankruptcy filing (from the Wall Street Journal, Business Week, Barrons, Fortune, and regional business newspapers) were analyzed in order to determine the company's reason for filing. Filings classified as strategic bankruptcies had to meet four criteria:

There must be one identifiable stakeholder group against which the firm could be employing Chapter 11 (e.g. product users).
There must be a single identifiable action the stakeholder group was taking that the firm sought to thwart via its filing of Chapter 11 (e.g. collecting on lawsuits).
There must be a specific goal which a Chapter 11 filing could aid the firm in accomplishing (such as a reduction in lawsuit awards).
The filing must go beyond simply staying the actions of general creditors to collect debts.

The first two criteria address the notion of bankruptcy strategy as a ploy, the last two ensure that the bankruptcy indicates some kind of plan. All other filings were classified as non-strategic bankruptcies.

Classifications

Fifty-five of the 155 bankrupt companies in the developed list of companies possessed strategic elements. These were categorized into nine stakeholder groups. These stakeholder groups were then divided into a total of 16 subgroups based on the firm's apparent rationale for filing. These categories and subgroups are described in Table 2.

Table 2 about here.

To create a more parsimonious set of categories, the nine stakeholder groups in Table 2 have been sorted into four clusters based on common themes (see Sheppard, 1994a for further details). The Capital Providers cluster addressed cases where the bankruptcy strategy thwarted the actions of shareholders or impacted the actions of creditors in ways that are not straightforward stays. The Government cluster dealt with those cases where the bankruptcy strategy involved the firm receiving some benefit from the government which made the firm's continued existence more likely. The Press cluster involved cases where a firm was somehow connected to a scandal, and the bankruptcy filing removed the firm from public scrutiny and allowed it to get back to business. Finally, the Miscellaneous / Legal Issues cluster concerned those firms employing the bankruptcy strategy to resolve some legal issue involving a contractual obligation (contracts, leases, union agreements) or an implied contractual obligation (fair trade, implied warranties of product merchantability).

Table 3 about here.

The remaining sample consisted of 100 non-strategic bankrupt companies. A detailed list of the non-strategic bankrupt companies is included in Appendix 1. All companies involved in strategic bankruptcies, and the groups to which they belong, are included in Table 3.

Returns To Shareholders

The next step of the research involved a determination of how well the company performed from the shareholders' point of view. The reason shareholders were selected was as follows. Since common shareholders are the last in line to receive anything after a bankruptcy, one would assume that if shareholders received anything, creditors -- as well as a wide variety of other stakeholders -- would also have obtained something. Thus, the needs of a great many stakeholders would likely have been addressed if common shareholders received some net benefit from the filing. Of concern here, however, are the shareholders. Since managers and directors -- in theory -- have a responsibility toward shareholders, one would assume that entering into Chapter 11 (particularly, the "strategy" of entering Chapter 11) would be in the shareholders' best interest.

To determine what happened to these Chapter 11 firms, computer searches of several dataases were run. In addition, the Commerce Clearinghouse's Capital Changes Reporter and Financial Information's Directory of Obsolete Securities were employed to trace securities. Capital Changes Reporter, Moody's manuals and press reports were searched to ascertain what stock conversions (i.e. pre-bankruptcy shares traded in for new shares) and dividends had been issued since the firm's Chapter 11 filing. Finally, Standard & Poors' Directory of Corporate Officers & Directors indexes were cross checked in order to trace firm names since, in an effort to 'start over', firms will sometimes change their name. Appendix 2 presents the list of the firms that changed their names.

Returns to shareholders were calculated to address the question, "Did the move into Chapter 11 improve the long-run financial well- being of the shareholders?" To calculate returns to shareholders, the share price on the day prior to filing was compared to the share price at the end of 1992. Annual returns to shareholders were calculated as follows:

AR = ASR - AMR

where AR = Annual Returns
ASR = Average Shareholder Returns
AMR = Average Market Returns

and where ASR = [(Me - Mf) / Mf] / Y
AMR = T / Y

such that Me = Market value of pre-bankruptcy shares (adjusted for dividends, splits, and payments) at the end of the study period (12-31-92).
Mf = Market value of common shares on the day prior to filing.
Y = Years since the bankruptcy until 12-31-92.
T = Three month T-bill rate⁴ compounded to 12-31-92.

Sirower (1991) observed that the price immediately prior to filing is the lowest price a stock will possess. Both Sirower (1991) and Hambrick & D'Aveni (1988) note that this is the point at which the organization's downward spiral halts, that it is possible for conditions to improve from there onward, and that the value of the company to shareholders should also improve.

Over half the firms in the sample had a -100% return to shareholders; i.e. their stock was worthless. About 40% of the strategic bankruptcies and about 65% of the non-strategic bankruptcies were worthless. As shown in Table 4, this difference in worthless rates is significant (p <.01). Only 14 of the 155 bankruptcies in the sample (about 9%) resulted in a return to shareholders that was positive relative to the market rate. The majority of these 14 companies utilized strategic bankruptcy. Ten of the positive return companies (72%) were strategic bankruptcies, four were non-strategic (28%). This difference in positive return rates is significant (cross-tabs Chi²of 7.05, p <.01) -- as shown in Table 4.

Table 4 about here.

Annual returns⁵ for the 100 non-strategic bankruptcies in the sample averaged -3.923 (with a standard deviation of 1.94). The 55 strategic bankruptcies averaged an annual return of -1.175 rate (with a standard deviation of 7.94). The returns for the two groups were compared via a test of means -- a T-test -- (not an uncommon test for bankruptcy data; see Sheppard, 1994b). Strategic bankruptcies, on average, had a significantly higher return to shareholders than the non-strategic group (T = 2.53, p <.05). However, neither type of bankruptcy produces an above market rate of return since the returns for both groups are negative.

While both strategic and non-strategic bankruptcies result in negative returns, there may be some subgroups of strategic failures which create positive returns. In order to investigate this possibility the one way Analysis of Variance (ANOVA) shown in Table 5 was performed.

Table 5 about here.

The results of the Scheffe procedure shown in Table 5 demonstrate that the firms which filed for a strategic bankruptcy when dealing with a Miscellaneous/Legal Issue had significantly different returns from those firms dealing with capital providers (p <.01). While the Miscellaneous/Legal Issues group was the only one in which there were positive returns to shareholders the ANOVA does not tell us whether the rate of return was significantly better than what could have been achieved in the market over the same time frame. To investigate whether this group of strategic bankrupts performed at better than the market rate, a pairwise T-test comparing average shareholder returns to average market returns was performed. Although firms in this group, on average, out-performed the market rate of return, the difference was not significant (pairwise T of 1.36 was not significant at .1). Within the Miscellaneous / Legal cluster, only firms fending off a single lawsuit had returns significantly higher than market (p < .01 via pairwise T-test comparing average shareholder returns to average market returns).

Very few strategic bankruptcies had higher than market rates of return. Many categories within the set of strategic bankruptcies had lower than market rates of return⁶. Thus, one is tempted to discard the idea of Chapter 11 filing as a useful strategic ploy. However, it is possible that effective use of bankruptcy as a strategy may be contingent upon some other factors. To address this possibility, a final test was run.

Other Possible Conditions That May Impact Investor Returns

To investigate the possible impact of other factors related to returns from bankruptcy, two variables were studied: (1) the firm's size at filing, and (2) the company's equity at filing. While this list is not exhaustive, given the exploratory nature of the present research, it should be a sufficient starting point from which to evaluate some contingencies which might suggest that the use of strategic bankruptcy can lead to positive shareholder returns.

Corporate Size

Firm size has been identified as one of the most important variables that impact the relationship between strategy and performance (Hoffer, 1975; Smith, Guthrie and Chen, 1989). Moulton and Thomas (1993) found that firm size was the most important variable in determining whether companies successfully reorganized. Firm size has long been recognized as an important determinant for organizational survival in the Population Ecology literature (for a review see Singh and Lumsden, 1990). As well, Finance literature has long been concerned with attempting to control for firm size effects in failure studies due to the impact firm size may have on survival likelihood (e.g. see Altman, 1968).

While it is thus important to include size as potential factor in determining the outcome of a Chapter 11 filing, the direction of the relationship between firm size and survival is debatable. Large firms are typically viewed as more likely to be successful. Moulton and Thomas' (1993) research showed that large firms are more likely than small firms to survive Chapter 11 reorganization intact. The likelihood of failure among small firms is well known in the Population Ecology literature as "the liability smallness" (Singh and Lumsden, 1990). However, smallness may not always be a liability. A small firm may have the advantage of quicker response to environmental change. This is because smaller firms may be organized in a less mechanistic manner and their response to external threats may thus be quicker than that of a larger organization (Staw, Sandelands and Dutton, 1981; Sutton and D'Aunno, 1989).

In order to be consistent with Moulton and Thomas' (1993) study, the measure of size employed here was firm asset size. The list of 155 sample firms was divided into small versus large firms. Small firms had less than the median $49 million in assets; large firms had more than the median $49 million in assets.

Company Equity

Company equity may also impact a company's response to threats. Equity can be considered a form of "organizational slack" (Sheppard, 1994b). Firms lacking slack resources may be more likely to encounter managerial paralysis or rigidity (Smart and Vertinsky, 1977; Staw, et. al., 1981) when the need for change is critical -- as it is in reorganization. If such rigidity occurs, shareholder value will be dissipated since it is unlikely that management will make timely decisions that could halt the company's downward spiral in its earlier stages (Hambrick & D'Aveni, 1988). In addition, part of the logic behind the enactment of the 1978 bankruptcy law was to encourage companies to file earlier, while they still had some equity from which to rebuild the firm (Cifelli, 1983). If Congress was correct in its estimation that early filing companies are the ones with sufficient equity bases to survive bankruptcy, then equity would be an important variable in determining reorganization success likelihood.

The ratio of equity over total assets was used as the measure of a firm's resource base. For financial institutions, net worth over total assets is also a general indication of solvency (Mun & Garcia, 1983). Pinches & Mingo (1973) and Chen & Shimerda (1981) also mention this ratio as an important, useful one. Therefore, the list of 155 firms was divided into low versus high equity firms. Low equity firms had less than a median equity to asset ratio of 9.1%; high equity firms had more than a median equity to asset ratio of 9.1%. Test of the Impact of Size and Equity Base

To evaluate how the two factors of size and equity base -- along with strategy -- impacted the returns provided to shareholders, an ANOVA was performed. Results of the ANOVA are shown in Table 6. Table 6 also notes the group which had the highest returns within each category. These high return groups would most obviously be preferred by shareholders (detailed returns for all groups are included in Appendix 3).

Table 6 about here.

The ANOVA results show that the main effects were significant (p <.001). In particular, there was a statistically significant relationship between annual shareholder returns, strategy and equity base (p <.05). Corporate size was the only factor not significantly related to returns. Although strategic bankruptcies, large companies and high equity companies all fared well, none of these groups, on average, had returns that exceeded the market rate of return (as shown by their negative return figures).

The two-way interaction between strategy and purchase in the ANOVA was of minor significance (F = 3.62, p <.1). Each two-way interaction creates four possible sub-groups. Thus, strategy and equity create: (1) low equity, non-strategic bankruptcies, (2) low equity, strategic bankruptcies, (3) high equity, non-strategic bankruptcies and (4) high equity, strategic bankruptcies. Thus, Table 6 also shows which sub-group had the highest returns for each interaction. As shown in Table 6, Strategic / High Equity companies had positive -- above market -- returns to shareholders. However, a pairwise T-test comparing average shareholder returns to average market returns showed that the returns these for these sub-groups of bankrupt companies were not significantly greater than the market rate of return over the same period (p <.1). Three way interactions in the ANOVA were not significant (p <.1).

Results Summary

Generally, the results of the present study show that strategic bankruptcies out-perform their non-strategic counterparts. Impacts from other factors are shown in Table 7.

Table 7 about here.

In general, Table 7 shows that a larger firm equity base can help shareholders realize more of their investment. Size does not significantly impact these other factors. In any case, only very rarely did shareholders of bankrupt firms realize returns that were greater than the market rate. This was generally true for both strategic and non-strategic bankruptcies.

Discussion

Shareholders can make high rates of return in the year following a Chapter 11 filing according to Sirower (1991). The present study looked at the longer run return to shareholders -- more than five years. In theory, management should be managing the company for the long run benefit of the shareholders (Hax & Majluf, 1984). Did Chapter 11 bankruptcy -- particularly strategic bankruptcy -- aid shareholder returns? Were there other conditions that may have helped shareholders earn higher long run returns?

Synopsis of the Results

Generally, Chapter 11 filers are poor long run investments. If one invested equal amounts in each of the 155 companies studied here in the month they went bankrupt, the return on investment would average substantially below what one could have obtained by investing in long term risk-free investments during the same time period. Given the risk involved in investing in these types of firms, the long-run return is very low.

Strategic bankruptcies, in general, had below market returns. Only single lawsuit cases had significantly higher returns than market. In the single lawsuit cases, investors may have simply over- estimated the ability of the main creditor to press its claims against the debtor where the debtor was about to file for Chapter 11 reorganization. Possibly, the fact that the solution to the firm's problems was simple and obvious (re-negotiate the amount of the claim down to an amount the company could afford to pay) that it could be dealt with in a far more easy and legally inexpensive way than investors would have predicted.

Size and reorganization success were found to be strongly related to one another in Moulton & Thomas' (1993) work. They defined successful reorganizations as those where the firm maintained its identity, continued to be publicly traded on a national exchange and kept at least half its pre-bankruptcy assets. The firms with the highest returns in the present study -- Lafaytte Radio and Sam Soloman -- would not have qualified as even partially successful companies for Moulton & Thomas. Both firms were sold: Lafaytte to Circuit City and Sam Soloman to Service Merchandise. The difference in results between Moulton & Thomas' study and the present one may be the result of the differences in how one defines success. In other words, size may be important in allowing a firm to keep its identity, but it has no effect with regard to maximizing shareholders' returns.

There is another way this difference between survival and returns may impact the results. Large size may cause higher numbers of firms with low average returns to survive. Small firms may be less likely to survive but those that do could have higher average returns. This is in fact the case with the present study. While shares in 69% of small firms became worthless, only 44% of shares in large firms became worthless (as shown in Appendix 4, cross-tabs Chi² of 8.93 is significant at .01). Among the non-worthless firms, large firms had a somewhat lower annual return to shareholders than smaller firms (though not significantly so). Small firms had an annual return of - .3 and large firms had an annual return of -1.03. Why might this happen?

Large companies may have the reputational capital to insure proper funding support (D'Aveni 1989) but their relatively more mechanistic structures (Staw, et. al., 1981) may cause great delay in their developing of plans that could stop the downward spiral of decline soon after their filing (Hambrick & D'Aveni, 1988). These firms thus have substantial organizational inertia which better insures their existence but inhibits their ability to change (Hannan & Freeman, 1984). This would be so even when they are under extreme pressure to change (Zajac & Kraatz, 1993) -- as is the case in a bankruptcy filing. Thus, these firms produce relatively poor average returns.

Conversely, small firms may lack reputational capital to insure proper funding (D'Aveni, 1989) but they may be able to change more quickly due to more organic structures (Sutton & D'Aunno, 1989) and lower organizational inertia (Hannan & Freeman, 1984). Also, small firms may be able to attract new investors who can purchase sufficient equity in the company so that old management can be forced out. This would not only provide new capital for a fresh start but also allows the company to bring in people better able to develop new strategies (Slatter, 1984) to break the firm free of its downward spiral (Hotchkiss, 1995). So, it is evident that fewer small firms survive, but the ones that do have higher returns. The net effect is that the average return among these firms will be poor due to the significant number of worthless ones.

Thus, the inertial forces which aid the large firm's survival (e.g. reputational capital) are balanced out by those which hinder change (e.g. mechanistic structures). Likewise, inertial forces which defeat the small firm's survival (e.g. lack of reputational capital) are balanced out by those which promote change (e.g. organic structures).

Equity was found to be far more important than size in aiding positive shareholder returns. The impact of equity on returns likely stems from two sources. One is the simple point that a stronger equity base is a foundation upon which a restructured company can be built (Sheppard, 1994a). Two, equity allows shareholders some ability to pursue their claims against the company. If there is little to no equity in the company, shareholders fail to be "real parties in interest" at filing (Sabin, Neporent & Weiner, 1991). Without equity, courts could, in theory, block the rights stockholders may have in the bankruptcy proceedings -- including the rights to any claims on the firm or its assets (Sabin, et. al., 1991). Thus, higher levels of equity may simply serve to allow shareholders to maintain their claims against the company⁷.

The interaction of equity and strategy was found to be significant in aiding positive shareholder returns. Flynn & Faird (1991) argued that there are circumstances under which early bankruptcy filing may be the best way to maximize shareholder wealth. The present study found that shareholders of strategic early filers -- i.e. firms with high equity, filing a strategic bankruptcy -- achieved positive returns. However, since the returns were not significantly above the market rate, there is relatively weak support for early filing. This leads to two questions. One, why was there any effect from the equity / strategy interaction on returns? Two, why were these effects not more significant?

There are two points to remember. One, a strategic bankruptcy is invoked to proactively deal with a single threat from an identifiable stakeholder group (Daily, 1994). By nature, the strategic bankruptcy is an expedient device to deal with a relatively simple problem (e.g. the threat posed by one lawsuit). Two, the presence or absence of organizational slack (Cyert & March, 1963) in the form of equity base (Sheppard, 1994b) alters the organizations' response to threats. Bozeman & Slusher (1979, 346) note that "Scarcity-induced stress causes organizations to behave as if complex, dynamic and interrelated environments are in fact simple, static and unrelated."

So, the forces at work are: (1) the simplicity of the problem and (2) the resource base available to deal with the problem. High equity strategic filers would therefore be under less stress due to higher levels of resources (Staw, et. al., 1981). Yet, like many firms in crisis, they would respond by restricting information gathering and alternatives (Smart & Vertinsky, 1977). By doing so, they quickly focus on the simple and obvious solutions to what may be simple and obvious problems8. This appropriate response is in contrast to low equity non-strategic filers. These firms would be under more stress due, both to a scarcity of resources, and a set of problems and solution alternatives that taxes their information processing capabilities (Staw, et. al., 1981). By restricting information gathering and alternatives, such companies would be less likely to be come to decisions which would allow them to properly allocate resources and break free of their downward spiral (Argenti, 1986a and 1986b; Hambrick & D'Aveni, 1988)

Why would equity and not result in returns to shareholders significantly above market? It is possible that either (1) investors could not correctly estimate the corporation's likelihood of Chapter 11 filing or (2) they could not correctly estimate the effects that the filing would have upon their investment. In the first case, the filing might have taken investors by surprise and any possible impacts (positive or negative) from filing may not have been factored into the price. This is unlikely since there are many early warning signs of failure that investors could have identifed (e.g. see Argenti, 1986a and 1986b). It is more likely that the investors incorrectly estimated the outcome of the bankruptcy process for firms in this category. Being uncertain of how the courts would interpret the new bankruptcy statutes, investors could not have correctly estimated the value of the stock.

Implications for Practice

What do these results mean for investors of companies facing a Chapter 11 filing? First, investors should, in general, avoid these stocks as long term investments. The average return on investment here was substantially below the risk-free rate. Second, the presence of a high return category of strategic bankruptcy indicates some limited opportunity for significant returns above the risk free rate. Miscellaneous/Legal strategic bankruptcies may provide investors with a positive return -- particularly in cases where the company is attempting to use Chapter 11 to defend itself against the impacts from a single lawsuit. However, the positive returns found here may be fleeting. When the bankruptcy law was new there may have been uncertainties regarding how the law would impact some types of filings. The price may have been distorted as to allow for some positive returns. With investors having better knowledge of how the bankruptcy process works, the price distortion, along with possibilities for positive returns, may be gone. Finally, company size does not matter for the investor seeking high returns but for managers seeking corporate survival.

Managers should be aware that early filing is advantageous. Thus, as soon as managers realize that filing is inevitable, it is in the best interest of shareholders that it is done expeditiously. This is the case particularly for companies with a high equity base and problems that Chapter 11 can easily address (i.e. early filing strategic bankrupt companies). These companies may be best at achieving some sort of positive outcome from the bankruptcy process for their investors. The high returns for such filings may also suggest that there are circumstances where the threat-rigidity response may work in favor of an organization in crisis (as suggested by Staw, et. al., 1981). As previously suggested, such a response would serve to simplify the set of alternative problem solutions under circumstances where such simplification is most appropriate and resources for implementation still exist. Finally, managers of smaller firms going into Chapter 11 should not be totally disheartened -- provided their company was a strategic early filer. Though not significantly better than the market, small early filing strategic bankruptcies had the best rate of return.

Limitations

As in all studies, there are some limitations to the present research. There are several limitations which must be discussed. These include factors regarding definition, sample composition and time period studied, alternatives that may have served Chapter 11 filers better, and learning by investors or courts after the period of study.

The definition for strategic bankruptcy used here is a broad one and a narrowly-defined one may give different success results. However, a narrower definition may not cover as many possibilities open to managers who wish to pursue strategic bankruptcy. Also, given the sample size available, a narrow definition would not lend itself well to testing, while different interpretations of the available data might have resulted in different firm classifications. The exploratory nature of the present study did not allow for a more complete search of all possible data sources.

Sample composition may have also had an impact on the results. The minimum size and age limits set for sample firms could mean that younger or smaller firms may be at greater risk than the present analysis indicates. Hambrick & D'Aveni (1988) note this possibility as well.

There are two important items of note about the time period selected. First, in an effort to ensure firms made it through their Chapter 11 proceedings, no firms which initially filed after 1987 were included in the study. Since prepackaged bankruptcies, or "pre- packs" are a new twist to Chapter 11 in the last five years there are no pre-packs in the sample. The success likelihood of this particular category of strategic bankruptcies will thus require further study. Second, some firms re-entered bankruptcy after 1987 but have not yet come out of Chapter 11. Such firms were considered to be worthless since there was likely little that would be left for shareholders after a second round of Chapter 11 proceedings -- though the full impact of the second filing is unknown. Less than 5% of the firms in the sample were second filings after 19879.

Alternatives that may serve shareholders better than Chapter 11 may exist. Investors in companies that managed a turnaround or arranged workouts with their creditors versus returns to shareholders of companies that filed were not studied. For this reason, early or strategic filing cannot be wholeheartedly supported. For example, it is unknown how well a company could have done with a debt-for-equity swap as opposed to a Chapter 11 reorganization.

Learning by investors may change opportunities for future profitable shareholder returns. The results of the present study may simply demonstrate the failure of the market to price the stock correctly at filing. This may have occurred since investors had to deal with a new law (the 1978 Bankruptcy Act) that had yet to be interpreted. As bankruptcy case law built up over the years, investors should have improved their ability to evaluate good strategic bankruptcies. The opportunity for excess returns may have been a fleeting one brought on by a change in the law. In the future, investors may have to look for some new revisions to find future positive returns. Also, the courts may interpret the law more narrowly in the future. For example, if the bankruptcy courts begin to lean toward the plaintiffs' side in mass tort or single lawsuit cases, the parts of the broken bench which seemed beautiful may provide investors with some painful splinters in the future.

Directions for Future Research

Several avenues for future research present themselves as a result of the present study. These inquiries would deal with returns regarding specific types of bankruptcies, alternatives to bankruptcy, organizational response to the Chapter 11 filing, and learning by investors.

The present study found that the value of strategically filing for bankruptcy in general to be questionable. However, research into the category of Miscellaneous / Legal strategic bankruptcies, high equity strategic bankruptcies, or pre-packaged bankruptcies may be fruitful avenues for looking into circumstances where Chapter 11 could enrich shareholders. Of particular interest may be the returns to shareholder when the firm is merged into another after Chapter 11. The firms with the highest shareholder returns in the present study fell into this category.

While it was beyond the scope of the present study, investigation into the returns to shareholders of declining corporations that sought to move away from ruin by other methods may prove an interesting area of study. For example, a financial restructuring or workout arrangement with creditors may have provided better returns for shareholders.

The organizational responses that cause some Chapter 11 filers to become worthless and others to have returns above the market need to be studied. How the combination of organizational inerita and managerial paralysis or rigidity work within the organization that has filed for Chapter 11 reorganization may have great impact upon returns to shareholders.

Finally, the ability of investors to learn from prior court decisions could be studied to see if returns on these type of investments decline as the market learns how to interpret the impact of the law. As the law in this area becomes clearer returns should begin to approach zero relative to the market. Investors should become better at pricing the stock at filing. Extraordinary returns would thus be less likely to occur in the future since investors have learned which types of strategic filings are likely to be successful and now price the pre-bankruptcy investment accordingly.

Conclusion

There are some types of strategic bankruptcies which can result in positive returns to shareholders. However, the number of high return types is low and the extent to which these types provide shareholders with returns that are significantly above market is limited. Returns to shareholders of companies that either merged after Chapter 11 filing, or sought alternatives to bankruptcy could be fruitful avenues for future research. Finally, what the present research shows is the importance of having some useful guide -- in this case a typology -- to find a way around the confusing landscape of strategic bankruptcies. Like the streets of Venice, it is easy to get lost without a map, and hopefully the present research provides one.

Endnotes

In a sense, stakeholders become competitors for the company's assets.
On the surface, some strategic bankruptcies against creditors often appear to be filings for straightforward stays as well. However, the difference between the strategic and non- strategic bankruptcies in these cases is that the non-strategic ones are using the stay to develop a plan to reorganize and the strategic ones have already developed a plan whose implementation the creditors were unwilling to support. The strategic filing is thus a way to force that support and allow for the full implementation of the plan. As will become clearer, in-depth analysis of the press reports of these types of strategic filers reveals a complex underlying strategy, or ploy. Analysis of press reports on non-strategic filers does not reveal the same machinations.
An example of using Chapter 11 against a non-traditional creditor would be the use of bankruptcy by Manville Corp. (successor to Johns Manville) to sort out thousands of asbestos claims which could potentially be filed against the company. An example of a strategic use of Chapter 11 against a traditional creditor would be Magic Circle Energy's attempt to use bankruptcy to force its bank to release real estate collateral to allow oil drilling.
The simple annual percentage returns to shareholders used here represent excess returns over the risk free rate. Analysis was also performed to evaluate excess returns relative to investments with a somewhat higher degree of risk, i.e. change in the Dow Industrial Average from the time of Chapter 11 filing until the end of 1992. When the Dow figures were substituted for the average market the results did not differ significantly from the results of the study shown here.
The numbers employed were the transformed returns. The transformations were designed to reduce the impact of outliers. The numbers were transformed using the square root of the absolute value of their percentage returns. In order to maintain the variables' signs these values were multiplied by the untransformed value over the absolute value of the untransformed value.
On average, the shareholder returns for firms filing for strategic bankruptcies dealing with capital providers or the government had significantly lower rates of return than the market (p<.001 via pairwise T-test comparing average shareholder returns to average market returns).
However, due to the legal wrangling likely to occur, courts do not typically try to exclude stockholders from the bankruptcy proceedings when there is little to no equity.
This would explain the high returns for firms entering Chapter 11 to settle single lawsuit cases.
These firms were CS Group in 1989; Salant in 1990; Lionel in 1991; Combustion Equipment in 1992; and Tacoma Boat in 1993.

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TABLE 1: Strategic vs. Non-Strategic Bankruptcies

_________________________________________________________________________________________________________________

_ _ _ _

_ ATTRIBUTES _ NON-STRATEGIC BANKRUPTCIES _ STRATEGIC BANKRUPTCIES _

_ _ _ _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ Filing impacts _ _ _

_ one identifiable _ Usually commercial / financial creditors. _ Usually stakeholders other than commercial _

_ stakeholder group _ _ / financial creditors (e.g. customers). _

_ greatly _ _ _

_ _ Impacted identifiable stakeholders usually _ Impacted identifiable stakeholders usually _

_ Filing is at the _ assume, and accept, some level of risk in _ do not intend to accept a level of risk in _

_ expense of others _ their relationship with the bankrupt corp. _ their relationship with the bankrupt corp. _

_ _ (e.g. lenders risk loan default). _ (e.g. Dalkon Shield I.U.D. Customers). _

_ _ _ _

_ Filing deals with _ Creditors are attempting to seize assets _ Interference with normal operations (e.g. _

_ a single problem _ used as loan collateral (e.g. foreclosure). _ press exposure affecting govt. contracts). _

_ _ _ _

_ Filing may be _ _ _

_ seen as a _ Debtor is employing Chapter 11 to stay the _ Debtor employs Ch. 11 to re-negotiate some _

_ ploy or plan _ creditors' actions (e.g. stop foreclosure). _ agreement (e.g. lease agreements). _

_ _ _ _

_ Filing may be a _ Debtor is faced with immediate loss due to _ Debtor faces eventual loss due to stake- _

_ proactive measure _ stakeholder actions (again, foreclosure). _ holder actions (e.g. lawsuits overload). _

_ _ _ _

_________________________________________________________________________________________________________________

TABLE 2: Typological Categories of Strategic Bankruptcies Described

_________________________________________________________________________________________________________________

_ PLOY AIMED AT _ WITH THE INTENTION TO _ C O M M E N T S A N D E X A M P L E S : _

_________________________________________________________________________________________________________________

_ _ _ Force lenders to allow _ Prompt lenders to approve pre-bankruptcy proposals to change a _

_ _ Creditors _ for proposed capital _ firm's capital structure. This was how MGF hoped to force debt _

_ C _ _ structure changes. _ holders into an equity swap proposed prior to filing. _

_ A _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ P _ _ Allow firms to complete _ The firm attempts to use Ch. 11 to reduce debt to make it more _

_ I _ _ negotiation for sale of _ attractive to a waiting buyer. Whippany Paperboard used Ch. 11 _

_ T _ _ all / part of the firm. _ to complete negotiations for sale of the firm to new investors. _

_ A _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ L _ _ Allow a firm to finish _ Force lenders to allow completion of corporate strategy change. _

_ _ _ restructuring efforts _ Cook United tried using Ch. 11 to get additional funds to _

_ _ _ begun prior to filing. _ complete store remodeling. Eastmet tried using Ch.11 to reduce _

_ P _ _ _ debts involved in exiting an industry. _

_ R _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ O _ _ Force lender to release _ Magic Circle Energy tried using Ch.11 to attempt to force its _

_ V _ _ assets needed by firm. _ bank to release real estate collateral to allow oil drilling. _

_ I _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ D _ _ Force lender to provide _ To get credit to meet seasonal demand Wicks used Ch.11. Suppli- _

_ E _ _ for seasonal borrowing. _ ers who shipped after filing gained first priority to assets. _

_ R ___________________________________________________________________________________________________________

_ S _ Share- _ Stop takeovers / share- _ Hecks' Ch. 11 aided in thwarting a potential takeover. Schaak _

_ _ holders _ holder actions / clear- _ used Ch.11 to support ownership claims by its CEO. Altec used _

_ _ _ up ownership disputes. _ Ch.11 to avoid required payments to preferred shareholders. _

_________________________________________________________________________________________________________________

_ _ _ Pass unfunded pension _ Significant unfunded pension liabilities can be shed in this _

_ G _ Government _ costs to government _ manner. For Wheeling Pittsburgh Steel the amount of debt shed _

_ O _ _ backed insurance agent. _ was $475 million -- more than 30% of their total debt. _

_ V _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ E _ _ Use legally allowed tax _ Large losses mean future tax free income. MLX had $10 million _

_ R _ _ loss carryforward as an _ in assets / $150 million in debts after selling everything. By _

_ N _ _ asset to get investors. _ convincing lenders to provide equity and back acquisitions the _

_ . _ _ _ firm put to use $300 million in loss carryforward tax credits. _

__________________________________________________

_ _ _ Remove industry scandal _ Ch.11 gets firm out of the news & back to business. Mobile Home _

_ P _ The Press _ from public attention _ firms did so after bad press on the bill padding of FHA Loans. _

_ R _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ E _ _ Remove company scandal _ Firm gets back to business once out of the press. Wedtech did _

_ S _ _ from public attention _ this once it left its government procurement scandal behind. _

_ S _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ _ _ Remove mgmt. scandal _ Ch.11 quiets news about its exec.s so the firm can operate. As _

_ _ _ from public attention _ worked with Saxon Ind. after news of being looted by their CEO. _

__________________________________________________

_ M _ Buyers & _ Escape unprofitable _ Revere Copper & Brass was able to escape over-priced contracts _

_ I _ Suppliers _ contracts arranged with _ with its electric suppliers and under-cost contracts with its _

_ S _ _ buyers or suppliers. _ aluminum buyers via its use of Ch. 11. _

_ C __________________________________________________

_ . _ Competitors _ Avoid damage claims in _ Re-negotiate damage awards from a civil suit. Texaco used Ch.11 _

_ _ _ single lawsuit brought _ to avoid billions in damages awarded to Pennzoil. Smith Inter- _

_ / _ _ by a competitor. _ national used Ch.11 to avoid paying on patent infringement. _

_ __________________________________________________

_ L _ Customers / _ Avoid damage claims in _ The firm uses Ch.11 to solve many damage claims. Manville used _

_ E _ Prod. Users _ mass tort lawsuit filed _ it to handle thousands of asbestos related personal injury _

_ G _ _ by past product users. _ claims. A.H. Robins used it to deal with Dalkon Shield claims. _

_ A __________________________________________________

_ L _ Employees _ Escape unprofitable _ This is the well known ploy of using Ch. 11 to void union _

_ _ _ contracts with union _ contracts. Among firms in the present sample Tobin Packing _

_ I _ _ employees. _ could have benefited from this use of Ch. 11. _

_ S __________________________________________________

_ S _ Lessors _ _ Renters can get out of unprofitable leases. Flannigan's Enter- _

_ U _ _ Escape unprofitable _ prises was able to re-negotiate over priced leases via Ch. 11. _

_ E _ _ long term leases. _ By using Ch. 11, HRT Industries was able to shut down 55 of its _

_ S _ _ _ 192 retail outlets and regain profitability. _

__________________________________________________

TABLE 3: List of Strategic Bankrupt Firms by Type

__________________________________________________

_ Ploy Aimed at _ Intended Action _ C o m p a n i e s a n d F i l i n g Y e a r: _

__________________________________________________

_ _ Creditors _ Allow Cap. Change _ Global Marine '86 _ M G F Oil '84 _ Salant '85 _

_ _ __________________________________________________

_ _ _ Complete the Sale _ American Advent. '86 _ Roberts & Porter '83 _ Vector Graphic '85 _

_ _ _ of the Company _ Crompton '84 _ Transcon. Energy '84 _ Whippany Paper '80 _

_ Capital _ __________________________________________________

_ _ _ Finish a _ Cook United '84 _ Mesta Machine '83 _ Sambos Resturant '81 _

_ _ _ Restructuring _ Eastmet '86 _ Newbery '87 _ White Motor '80 _

_ _ _ Previously Begun _ J A M C O Ltd. '87 _ Richton Internl. '80 _ _

_ Prov- _ __________________________________________________

_ _ _ Release Assets _ Computer Depot '86 _ Magic Circle '85 _ _

_ iders _ __________________________________________________

_ _ _ Seasonal _ New England Fish '80 _ Sam Soloman '80 _ _

_ _ _ Borrowings _ Steiger Tractor '86 _ Wickes Companies '82 _ _

_ __________________________________________________

_ _ Shareholder _ Stop Investor Act _ Altec '83 _ Heck's '87 _ Schaak Electric. '85 _

__________________________________________________

_ Govern- _ Government _ Pension Costs _ L T V '86 _ Phoenix Steel '83 _ Wheeling Pitts. '85 _

_ _ __________________________________________________

_ ment _ _ Tax Loss _ Allis-Chalmers '87 _ McLouth Steel '81 _ _

_ _ _ Carryforwards _ Itel Corp. '81 _ Northwest Eng. '83 _ _

__________________________________________________

_ Press _ Press _ Industry _ Commodore Corp. '85 _ Mobile Home Ind. '84 _ _

_ _ _ Scandal _ Conner Homes '87 _ Tidwell Ind.s '85 _ _

_ _ __________________________________________________

_ _ _ Company _ Coleman American '80 _ National Paragon '85 _ Wedtech '86 _

_ _ _ Scandal _ Mego Internatnl. '82 _ Swanton '85 _ _

_ _ __________________________________________________

_ _ _ Mgmt. Scandal _ Rusco '81 _ Saxon Industries '84 _ _

__________________________________________________

_ _ Buy/Supply _ Avoid Contracts _ Revere Copper '82 _ _ _

_ Misc. / __________________________________________________

_ _ Competitors _ Avoid One Lawsuit _ Smith Interntnl. '86 _ Texaco '87 _ _

_ __________________________________________________

_ Legal _ Prod.Users _ Avoid Mass Torts _ Manville '82 _ Robins (A.H.) '85 _ U N R Ind.s '82 _

_ __________________________________________________

_ Issues _ Employees _ Union Agreements _ Tobin Packing '81 _ _ _

_ __________________________________________________

_ _ Lessors _ Void Leases _ Flannigan's Ent. '85 _ H R T Ind.s '82 _ Lafaytte Radio '80 _

__________________________________________________

TABLE 4: Worthless vs. Non-Worthless Shares / Positive vs. Non-Positive Returns

__________________________________________________

_ _ _

_ B a n k r u p t c i e s _ B a n k r u p t c i e s _

_ _ _

_ Strategic Non-Strategic _ Strategic Non-Strategic _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ _

_ S _ _ _ _ R _ _ _ _

_ h Worthless _ 23 (41.9%) _ 65 (65.0%) _ _ e Positive _ 10 (18.2%) _ 4 ( 4.0%) _ _

_ a _ _ _ _ t _ _ _ _

_ r _ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ _

_ e _ _ _ _ r _ _ _ _

_ s Non-Worthless _ 32 (58.1%) _ 35 (35.0%) _ _ n Non-Positive _ 45 (81.8%) _ 96 (96.0%) _ _

_ _ _ _ _ s _ _ _ _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑ_ _

_ _ _

_ Chi Square = 6.85 Sig. @ .01 _ Chi Square = 7.05 Sig. @ .01 _

_ _ _

__________________________________________________

TABLE 5: ANOVA Results Using Four Clusters of Strategic Bankruptcies

__________________________________________________

_ S T R A T E G I C _ S H A R E H O L D E R R E T U R N S _

_ _ÑÑÑÑÑÑÑ_ÑÑ&Ntild;ÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑ_

_ B A N K R U P T C Y T Y P E S _ N _ Mean _ Std.Dev. _ A N O V A R e s u l t s _

__________________________________________________

_ C a p i t a l P r o v i d e r s _ 26 _ -0.921 _ 0.968 _ F Statistic = 3.242 (p < .05) _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ _

_ G o v e r n m e n t _ 7 _ -1.221 _ 0.201 _ Scheffe Procedure Contrasts (p < .05): _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ _

_ P r e s s _ 12 _ -0.918 _ 1.256 _ Misc./ Legal not equal to _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ _

_ M i s c . / L e g a l I s s u e s _ 10 _ 0.731 _ 1.547 _ Capital Providers _

__________________________________________________

TABLE 6: ANOVA Results by Type of Bankruptcy, Size, Equity and Corporate Purchase

__________________________________________________

_ A N O V A _ A n n u a l _ F-Statistic _ H i g h e s t R e t u r n G r o u p _

_ Results _ S h a r e h o l d e r _ÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑ

_ _ R e t u r n s _ F _ Sig. _ G r o u p _ N _ Mean _

__________________________________________________

_ Main Effects _ 8.22 _ .001 _ _ _ _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ Strategy _ 9.29 _ .010 _ Strategic Bankruptcies _ 55 _ -1.17 _

_ Size _ .03 _ _ Large Companies _ 77 _ -2.62 _

_ Equity _ 5.91 _ .020 _ High Equity Companies _ 77 _ -2.18 _

__________________________________________________

_ Two-way Interactions _ 1.26 _ _ _ _ _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ Strategy and Size _ 0.03 _ _ Strategic / Small _ 19 _ -0.88 _

_ Strategy and Equity _ 3.62 _ .060 _ Strategic / High Equity _ 28 _ 0.53 _

_ Size and Equity _ 0.07 _ _ Large / High Equity _ 37 _ -1.70 _

__________________________________________________

_ Three-way Interactions _ 0.57 _ _ _ _ _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ Strategy, Size and Equity _ _ _ Strategic / Small / High Equity _ 11 _ 1.07 _

__________________________________________________

TABLE 7: Summary of Results

__________________________________________________

_ Results _ C o m m e n t s _

__________________________________________________

_ Shareholder Return for all Strategic Bankruptcies _ _ _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ A _ Did firms filing for strategic bankruptcy have _ Yes _ T-test shows a significant difference _

_ _ higher rates of return than non-strategic firms? _ _ between the two groups ( p < .05). _

_ L _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ Did firms filing for strategic bankruptcy have _ No _ The mean for strategic bankruptcies was _

_ L _ higher than the market rate of return? _ _ below the market rate of return. _

__________________________________________________

_ Shareholder Return by Strategic Bankruptcy Type _ _ _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ Did any types of strategic bankruptcies have _ _ ANOVA Scheffe Procedure Contrast rate _

_ _ _ Yes _ Misc./Legal not equal to _

_ T _ higher rates of return than other types? _ _ Capital Provider (p<.05). _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ Y _ _ One _ Misc./ Legal had positive returns, but _

_ _ Did any types of strategic bankruptcies have _ _ not significant (pairwise T: p<.1). _

_ P _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ higher than market rates of return? _ (one _ Misc./Legal Issues firms trying to avoid _

_ E _ _ small _ 1 lawsuit had significantly higher than _

_ _ _ group) _ market returns (pairwise T: p<.001). _

__________________________________________________

_ Other Impacts on Shareholder Returns _ _ _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ Was there a firm size / return relationship? _ No _ Not significant (ANOVA F: p<.1). _

_ _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ O _ Were there significant interactions with size? _ None _ Not significant (ANOVA F: p<.1). _

_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ T _ Was there a firm equity / return relationship? _ Yes _ Positive significant (ANOVA F: p<.05). _

_ _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ H _ Were there significant interactions with equity? _ Strategic / _ High equity strat. filers out performed _

_ _ _ High Equity _ others significant (ANOVA F: p<.05). _

_ E _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ _ None _ No group mean had a significant improve- _

_ R _ Did any sub-groups based on strategy, size, and _ _ ment over market (pairwise T: p<.1). _

_ _ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ

_ _ equity out-perform the market rate of return? _ (High Equity _ Most significant improvement over market _

_ _ _ Misc./Legal) _ for sub-group, pairwise T = 1.87: p<.12. _

__________________________________________________

APPENDIX: 1 List of Non-Strategic Bankrupt Firms

___________________________________ ___________________________________ ___________________________________

_ Filing Company Name _ Filing _ _ Filing Company Name _ Filing _ _ Filing Company Name _ Filing _

_ _ Year _ _ _ Year _ _ _ Year _

___________________________________ ___________________________________ ___________________________________

_ A I C Photo _ 1985 _ _ General Exploration _ 1986 _ _ Poloron Products _ 1981 _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑ_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑ_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑ_

_ A M International _ 1982 _ _ Geophysical Systems _ 1983 _ _ Pubco _ 1982 _

_ A T I _ 1984 _ _ Gilman Services _ 1982 _ _ R P S Products _ 1982 _

_ Advent _ 1981 _ _ Gilpin (Henry B.) _ 1980 _ _ Reading Industries _ 1981 _

_ Allied Technology _ 1980 _ _ Glover _ 1980 _ _ Richmond Tank Car _ 1983 _

_ American Monitor _ 1985 _ _ Goldblatt Bros. _ 1981 _ _ Robintech _ 1983 _

_ Amfesco Industries _ 1985 _ _ Good (L.S.) & Co. _ 1980 _ _ Roblin Industries _ 1985 _

_ Argo Petroleum _ 1985 _ _ Hardwicke Companies _ 1983 _ _ Ronco Teleproducts _ 1984 _

_ Barclay Industries _ 1981 _ _ Imperial Industries _ 1986 _ _ S A L Communications _ 1985 _

_ Beker Industries _ 1985 _ _ Inflight Services _ 1986 _ _ Seiscom Delta _ 1986 _

_ Berry Industries _ 1984 _ _ John F. Lawhon _ 1981 _ _ Servamatic Systems _ 1986 _

_ Berven Carpets _ 1982 _ _ Koss _ 1984 _ _ Shelter Resources _ 1982 _

_ Birdview Satellite _ 1986 _ _ K-Tel International _ 1984 _ _ Spencer Companies _ 1986 _

_ Bobbie Brooks _ 1982 _ _ Leisure Dynamics _ 1983 _ _ Spiral Metal _ 1983 _

_ Brody (B.) Seating _ 1980 _ _ Lionel _ 1982 _ _ Standard Metals _ 1984 _

_ Buttes Gas & Oil _ 1985 _ _ Lynnwear _ 1981 _ _ Steelmet _ 1983 _

_ C S Group _ 1982 _ _ Macrodyne Industries _ 1986 _ _ Stevcoknit _ 1981 _

_ Charter Corp. _ 1984 _ _ Magic Marker _ 1980 _ _ Storage Technology _ 1984 _

_ Combustion Equipment _ 1980 _ _ Magnuson Computer _ 1983 _ _ Sykes Datatronics _ 1985 _

_ Consolidated Package _ 1984 _ _ Marion Corp. _ 1983 _ _ Tacoma Boatbuilding _ 1985 _

_ Consolidated Petrol. _ 1984 _ _ Maxon Industries _ 1981 _ _ Tenna Corp. _ 1979 _

_ Crutcher Resources _ 1986 _ _ Mays, J. W. _ 1982 _ _ Texscan _ 1985 _

_ Crystal Oil _ 1986 _ _ Michigan General _ 1987 _ _ Todd Shipyards _ 1987 _

_ Dalco Petroleum _ 1983 _ _ Monolith Portland _ 1986 _ _ Towle Mfg. _ 1986 _

_ Dant & Russell _ 1982 _ _ Morton Shoe _ 1982 _ _ Towner Petroleum _ 1984 _

_ Data Access Systems _ 1983 _ _ National Shoes _ 1980 _ _ Travel Equipment _ 1980 _

_ Eagle Computer _ 1986 _ _ Nexus Industries _ 1985 _ _ U N A Corp. _ 1986 _

_ Edmos _ 1983 _ _ Nicklos Oil & Gas _ 1985 _ _ Unimet _ 1985 _

_ Evans Products _ 1985 _ _ Nucorp _ 1982 _ _ Upson _ 1980 _

_ First Hartford _ 1981 _ _ O X O C O _ 1986 _ _ Van Wyke Internatl. _ 1980 _

_ Flame Industries _ 1983 _ _ Opelika Mfg. _ 1985 _ _ Victoria Station _ 1986 _

_ Garland _ 1980 _ _ Penn-Dixie Industries _ 1980 _ _ Winn Enterprises _ 1986 _

_ Gateway Sporting _ 1981 _ _ Pettibone Corp. _ 1986 _ _ Xonics _ 1984 _

___________________________________ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ÑÑÑÑÑÑÑÑ_ ___________________________________

_ Pizza Time Theater _ 1984 _ ÊÊÊ

___________________________________

APPENDIX 2: Post Chapter 11 Filing Company Name Changes

__________________________________________________ __________________________________________________

_ _ _ _ _ _

_ Pre-Ch. 11 Filing Name _ Post-Ch. 11 Filing Name _ _ Pre-Ch. 11 Filing Name _ Post-Ch. 11 Filing Name _

_ _ _ _ _ _

________________________________________________________ ________________________________________________________

_ A I C Photo _ A I C International _ _ Magic Circle Energy _ M C E Inc. _

_ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_ _ÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑÑ_

_ Ame

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