Asset Allocation in Bankruptcy

This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. We identify 129,000 bankrupt establishments and construct a novel dataset that tracks the occupancy, employment and wages paid at real estate assets over time. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that even after accounting for reallocation, the long-run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users, in areas with low access to finance, and in areas with low economic growth, with magnitudes that illustrate their economic importance. The results highlight that different bankruptcy approaches affect asset allocation and utilization particularly when search and financial frictions are present.