“Asset Reallocation in Bankruptcy” by Shai Bernstein
This paper investigates the consequences of Chapter 7 liquidation and Chapter 11 reorganization on the reallocation and subsequent utilization of assets in bankruptcy. We identify 129,000 bankrupt establishments and construct a novel dataset that tracks the occupancy and utilization of real estate assets over time. Asset reallocation is widespread, as nearly 80% of real estate is not occupied by bankrupt owners five years after the bankruptcy _ling. We use the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into Chapter 7, despite their initial Chapter 11 filing. Relying on such variation as an instrumental variable, we find that real estate assets in Chapter 7 are 17.4% more likely to be vacant and employ 34% less workers in the five years after bankruptcy _ling than comparable plants that remain in Chapter 11. These effects are concentrated in thin local asset markets with few potential buyers. In contrast, no differences in asset utilization occur in thick asset markets, highlighting the importance of local markets and asset specificity in resolving financial distress.