I start by compiling a list of firms filing for bankruptcy in the US between 01.10.1979 and 17.10.2005. Within this period, bankruptcy in the US was governed by the Bankruptcy Reform Act of 1978, which was enacted on 1978 and became generally effective on October 1, 1979. In 2005, this Act was substantially revised by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Most of the provisions of this new Act became effective on October 17, 2005. Accordingly, by focusing on the period between 01.10.1979 and 17.10.2005, I am able to explore a phase where the legal framework within which US corporations could file for Federal protection remained largely unchanged.
I use seven sources to identify this study’s sample firms: 1) Bankruptcydata.com database;24 2) the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR);25 3) COMPUSTAT’s industrial file; 4) Professor Lynn Lopucki’s Bankruptcy Research database;26 5) SDC database; 6) Altman and Hotchkiss (2005), pages 15 to 20, and 7) a list of bankrupt firms provided by Professor Edward Altman. All firms are combined into a single list and duplicates eliminated, which yields a total of 3,437 unique cases. I then use the screening process described below to identify my final sample.
The firms are first located on the Center for Research in Security Prices (CRSP) database leading to 1,411 being eliminated, the main reason being that firms could not be found in CRSP. Moreover, a few other cases are also excluded because the firm’s ordinary common stock
24 See http://www.bankruptcydata.com/ for more details.
25 Publicly traded companies filing for bankruptcy are required to report it to the SEC within 15 days using a Form 8-K. In order to find the bankruptcy cases reported to the SEC, I search and manually analyse all 8-k Forms available on EDGAR that mention the keywords “bankruptcy”, “Chapter 11” or “reorganization”. The initial search was conducted with the help of 10kwizard, a software designed to facilitate the keyword search on EDGAR. See http://www.10kwizard.com/main.php?spage for details.
(CRSP share code 10 or 11) is not traded, the firm does not have at least 24-months of pre- event returns available on CRSP or does not trade on a major US stock exchange (CRSP exchange codes 1, 2 or 3) during that period.
My primary objective is investigating the post-bankruptcy stock price performance. Consequently, in step two, I delete 1,556 firms because they are delisted prior to or at their bankruptcy filing date. From the 470 surviving cases, the 58 firms for which accounting data is not available on COMPUSTAT for a 2-year period before the bankruptcy announcement year are removed. In step three, the 11 companies incorporated outside the US (as defined by COMPUSTAT) are also excluded in order to ensure consistency in the legal framework governing all bankruptcy cases analysed in this study. Penultimately, following prior research, I also remove all 40 financial and utility companies from my final sample.27 Utility companies are generally heavily regulated by the government, which results in bankruptcy having a different meaning for these firms. Financial companies are not considered because they are handled differently while in Chapter 11. The 10 companies filing for Chapter 7 are excluded in the last step of the screening process. The considerable legal differences and immediate consequences between filing for Chapter 11 or for Chapter 7 under the Bankruptcy Reform Act of 1978 justify this action.28
Table 3.1 summarizes my screening process. As can be seen, in the end, I identify 351 non- finance, non-utility industry firms that file for Chapter 11 between 01.10.1979 and 17.10.2005 and remain listed on a major US stock exchange after their bankruptcy date. All companies have sufficient data available on both CRSP and COMPUSTAT to conduct my analysis. These firms have 53 different two-digit SIC codes (168 different four-digit codes) indicating no significant degree of industry clustering. The maximum number of firms in any single four-digit SIC code is 16 (or 4.6 percent).29 Most of the sample firms trade on the NASDAQ (209 of 351,
27 Financial and utility companies are defined as in the 49 industry portfolios available at Professor Kenneth French’s website. See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html for details. 28 According to the Act, a company filing a Chapter 11 aims at reorganizing its business with the objective of becoming profitable again. Conversely, under Chapter 7, the company stops all operations and goes completely out of business. See section 2.4.1 for more details.
or 59.6 percent). Another group of 109 companies (31 percent) trades on the NYSE and the remaining 33 (9.4 percent) on the AMEX.
Table 3.1 Defining the sample
This table summarizes the steps undertaken to identify this study’s sample. The first stage is combining seven different data sources to identify an initial set of unique firms that filed for bankruptcy in the US between 01.10.1979 and 17.10.2005. In order to be included in the final sample any given company must comply with the following criteria: 1) have enough data on CRSP and COMPUSTAT to conduct the analysis, 2) be listed and remain listed after the bankruptcy announcement date, trading common stock and 3) be a domestic company, filing for Chapter 11. Financial and utility companies are not considered in the final sample.
N
Unique bankrupcies identified from the different data sources 3,437
Bankruptcies not found or with insuficient data on CRSP 1,411
Bankruptcies delisted before or at the bankruptcy filing month 1,556
Bankruptcies with insuficient data on COMPUSTAT 58
Bankruptcies classified as foreign 11
Utilities and financial firms 40
Firms filing Chapter 7 10
Final sample size 351