Bankruptcy Filing and the Expected Recovery of Corporate Debt

Using recovery of defaulted corporate debt from Standard and Poor's LossStats Database and bankruptcy filing information from Bankruptcy Research Database during the period 1987 through 2004, we find that the choice of bankruptcy filing venue has a significant impact on defaulted debt recovery. Creditors achieve 35% smaller recoveries in bankruptcies filed in Delaware or New York than in other states. Recoveries are found to be lower in New York than Delaware. This can be explained by the fact that a large proportion of fraud bankruptcies, which lead to lower expected recovery, were filed in New York. We also find that creditors are expected to recover more if a bankruptcy case is filed in the company headquarter state. In comparison with previous findings, prepackaged bankruptcies are found to lead to higher recovery. In addition, we find that the average recovery rates of defaulted firms that did not formally file for bankruptcy are 40% higher than the recovery of bankrupted firms. This shows that creditors expect bankruptcy costs to be high in formal bankruptcy negotiation and reorganization.