Patience Is a Virtue: Evidence from Insolvency

Pre-packaged reorganization (prepack) takes ex ante better firms through a shorter and less costly bankruptcy procedure compared to traditional Chapter 11 but leads to more refiling. To explain this phenomenon, we propose an information acquisition model where creditors trade higher bankruptcy costs under traditional reorganization with higher accuracy in filtering inefficient from efficient firms. The prepack decision is governed by the value of the signal that a firm can acquire under traditional Chapter 11. Empirically, firms with better information and higher downside risks choose traditional reorganization. These firms subsequently have a lower rate of emergence but a higher survival rate.