“Overall, these results show that a firm operating in bankruptcy might be able to improve the quality of its services only temporarily,” the authors write. “The only significant improvement we document is the one stemming from changes that relate to investments in durable fixed assets.”How does this research apply to other industries? Consider retail. Capital investments made during Chapter 11 to improve locations, for instance, might be the main legacy of a company’s stay in bankruptcy and the chronic challenge facing competitors. Kmart, for example, emerged from Chapter 11 in 2003 with five prototype stores—featuring wider aisles, better product selection, and brighter lighting—that paved the way for a rebound based on fewer but better-quality locations.
While under bankruptcy protection, airlines upgraded their fleet and experienced fewer cancellations and delays. After they emerged from insolvency, however, their performance returned to pre-bankruptcy levels. This analysis indicates that firms use Chapter 11 to temporarily change the quality of their products and services, but that only investments in fixed assets have staying power.