The Effect of §363 Sales on Recovery Rates: Allowing for Self-selection Bias
Abstract: This article empirically examines the determinants of the resolution choice i.e. choice between §363 sales and traditional Chapter 11 reorganization; the determinants of the availability and size of debtor-in-possession financing; and the effects of resolution choice on recovery rates. We find that business justification standard for not going though the traditional process of disclosure and plan confirmation is not randomly applied. The resolution choice doesn’t influence on the availability or on the magnitude of DIP financing. Predominant factor explaining difference in recovery rates is profitability prior to bankruptcy rather than the resolution choice. After controlling for self-selection (which is significant and effective), traditional reorganization does seem to offer higher recovery rates comparable to preplan sale, but results are neither statistically robust, nor as important as it is argued in LoPucki and Doherty (2007). Availability of DIP financing doesn’t significantly affect recovery rates unless its size is considerable. The increase in relative size of DIP financing makes everyone better-off. Although results suggest that there is no systemic error with respect to companies that opt for preplan sales there are certainly several important procedural issues that could be improved while keeping the flexibility of section 363(b).
