Donoher 2004

Journal of Management 2004 30(2) 239–262
To File Or Not To File? Systemic Incentives,

Corporate Control, and the
Bankruptcy Decision
William J. Donoher∗
Foster College of Business, Bradley University, Peoria, IL 61625, USA
Received 23 June 2002; received in revised form 31 October 2002; accepted 28 February 2003
This research investigates the distinctions between bankrupt firms and equally leveraged firms
that avoid bankruptcy. Building upon the systemic incentives of bankruptcy law, and specifically
those applicable to Chapter 11 reorganizations, the study argues that the firm’s governance
and capital structure characteristics moderate the relationship between the firm’s financial
condition and the filing decision. The results of this study indicate that, contrary to agency
theoretical predictions, firms with high levels of inside equity ownership and secured indebt-
edness file in poorer financial condition than peer firms with low levels of these variables. By
contrast, firms with high levels of outside equity ownership and short-term indebtedness file
when in relatively better financial condition.
© 2003 Published by Elsevier Inc.
The recent demise of Enron and the well-publicized struggles of Kmart Corp. have fo-
cused popular attention on the phenomenon of corporate failure and bankruptcy. But the
public spectacle of these cases obscures a more fundamental issue concerning the timing
of the bankruptcy decision. By way of illustration, consider Kmart’s situation. For several
years prior to filing for reorganization, Kmart steadily lost ground to its national rivals
Wal-Mart and Target, a state of affairs both cause and consequence of its continually de-
teriorating financial condition. The company could have sought to reorganize at any point
in time, but delayed until its distress was irremediable outside of bankruptcy. Yet, many
companies file before becoming completely insolvent, and indeed, when we survey Chapter
11 filings, it becomes apparent that organizations file under dramatically different financial
circumstances and levels of distress. This article investigates the issues surrounding the
∗Tel.: +1-309-677-3715; fax: +1-309-677-3348.

E-mail address: wdonoher@bradley.edu (W.J. Donoher).
0149-2063/$ – see front matter © 2003 Published by Elsevier Inc.

doi:10.1016/j.jm.2003.02.003
240 W.J. Donoher / Journal of Management 2004 30(2) 239–262
bankruptcy decision and attempts to identify some of the reasons for distinctions such as
these. The central question addressed here is, At any given level of distress, why do some
firms enter bankruptcy while others do not?
To date the scholarly literature has devoted comparatively little attention to organizational
distress (Daily & Dalton, 1994a; Hambrick & D’Aveni, 1988). Most existing research in-
vestigating the phenomenon generally can be divided into two streams, one examining
the firm-specific antecedents and consequences of decline and bankruptcy, and the other
focusing on what might be referred to as the context or process of bankruptcy. Studies
adopting the former perspective often have focused upon identification of financial predic-
tors of bankruptcy (e.g., Flagg, Giroux & Wiggins, 1991; Shumway, 2001). Other work in
this stream has documented declining firms’ tendency to experience a “downward spiral”
(D’Aveni, 1989; Hambrick & D’Aveni, 1988, 1992), high levels of governance dysfunc-
tion (Daily, 1995, 1996; Daily & Dalton, 1994a, 1994b, 1995; Gales & Kesner, 1994), and
both managerial and directorial displacement (Gilson, 1989, 1990; Gilson & Vetsuypens,
1993; Hotchkiss, 1995). The research adopting a contextual or process-oriented lens has
documented the cost of bankruptcy (e.g., Lawless & Ferris, 2000), the potential stigma of
bankruptcy and its impact on managerial employment capital (Sutton & Callahan, 1987),
and the relatively low incidence of successful reorganization in bankruptcy (Moulton &
Thomas, 1993). More recently, a third stream investigating post-bankruptcy issues has be-
gun to emerge (e.g., Alderson & Betker, 1999; Dawley, Hoffman & Lamont, 2002; Eberhart,
Altman & Aggarwal, 1999).
What remains unclear, however, are the dynamics of the bankruptcy decision, including
the extent to which contextual and firm-level factors jointly shape the decision to file at a
given point in time. Specifically, an important but as yet unexplored contextual theme is
the nature of the reorganization process itself and its impact on the bankruptcy decision.
This article contributes to our knowledge of organizational distress and bankruptcy by: (1)
investigating the impact of the reorganization process on the incentives of various control
parties; (2) proposing and testing an extended theoretical model of incentives and control
systems specific to the context of organizational distress; and (3) providing insight into
how different control mechanisms operate, or fail to operate, within this context. Atten-
tion turns first to a discussion of the bankruptcy process, after which the impact of the
process on the bankruptcy decision will be elaborated within the context of the theoretical
model.
Theory and Hypotheses
The Chapter 11 Process
The present Bankruptcy Code (the “Code”) was enacted with the passage of the Bankruptcy
Reform Act of 1978, which sought to rationalize and systematize pre-reform bankruptcy
practice (Felsenfeld, 1996; Gertner & Scharfstein, 1991; Warren & Westbrook, 1986). Un-
der the Code, corporate debtors may elect to file either a petition for liquidation (Chap-
ter 7) or reorganization (Chapter 11). Reorganizations under Chapter 11 assume that the
debtor organization ultimately will emerge from bankruptcy after negotiation and mutual
W.J. Donoher / Journal of Management 2004 30(2) 239–262 241
acceptance of a plan of reorganization (Warren & Westbrook, 1986); thus, in this instance,
bankruptcy does not necessarily equal corporate death, a factor critical to understanding the
framework proposed herein. Indeed, although bankruptcy often is thought of as a conse-
quence of financial distress (e.g., Kallen, 1991), nothing in the Code precludes even healthy
firms from filing or attempting to take advantage of the settlement procedures of the Code.
Thus, reorganization is the appropriate focal point for this study because issues of power
balance and control are implicated in the process of negotiating a settlement, and because
the presumption of continuation gives the participants, especially management, some ex-
pectation of gain subsequent to the reorganization.
Given this, the decision to file can be expected to reflect the balance of interests within
the organization. From the standpoint of corporate law, board authorization is necessary
in order to file the bankruptcy petition (see Felsenfeld, 1996; Warren & Westbrook, 1986,
for a general elaboration of bankruptcy procedure). As a practical matter, and as we might
predict from an agency theoretical perspective (e.g., Fama & Jensen, 1983a, 1983b; Jensen
& Meckling, 1976), action by the board reflects the preferences of control parties or those
otherwise able to assert their interests. Some may prefer immediate resolution; others may
be content to wait. Only when the general consensus or the preferences of dominant control
parties favor filing is the board likely to act.
Whether such parties see an advantage to filing or delaying depends in turn upon the
priority of their claims and their prospective ability to maximize those claims in reorga-
nization. The doctrine of absolute priority, which requires satisfaction in full of a given
claim priority prior to satisfaction in part of any lower priority claim, theoretically acts to
protect the interests of creditors, especially secured creditors, over those of equity hold-
ers (e.g., Weiss, 1990). However, the Code’s voting rules turn the reorganization into a
negotiated settlement process in which each group of claimants, referred to as a “class,”
has a voice. More critically, with certain exceptions, each class must vote to approve the
plan of reorganization, even those of low priority. Often as a result of differing opinions
regarding asset value and the resultant distribution, one or more classes in fact may be
unsatisfied with the initial proposal for reorganization, and as a result may either op-
pose confirmation or advance a claim for a greater distributional share. The question for
other classes then becomes whether to oppose or accede to such a demand, when ac-
ceptance may come at the expense of a slightly lower share. In deciding this question,
cognizance must be taken of the fact that the Code provides no compensation for the
time value of claims. Thus, rather than engage in protracted negotiation or litigation with
respect to asset valuation, it may be preferable for one class to accede to the demands
of another class merely in order to gain support and maintain the present value of its
claim.
Consistent with the foregoing discussion, empirical evidence suggests that absolute pri-
ority often is violated, particularly among relatively solvent debtors in which more asset
value is at stake and delay in settlement is all the more costly (LoPucki, 1993; LoPucki &
Whitford, 1990, 1993a, 1993b; Weiss, 1990). The implications of this finding are critical
to the balance of the present study. Recall that the Code imposes no solvency tests and
that companies may enter Chapter 11 in any condition. Lower priority claimants, as the
price of their acquiescence to the plan and the consequent avoidance of costly delay and
additional litigation, may be able to extract a more favorable settlement than that to which
Financial Condition
Equity Ownership Board Composition
Inside equity H1
Outside equity H2
H3 Outside
percentage
H4 Investor
representation
H5 Creditor
representation
Creditor Influence
Secured debt H6
percentage
Short-term debt H7
percentage
Filing Decision
Figure 1. Moderated relationship between firm financial condition and bankruptcy filing. Dashed line indicates
unhypothesized relationship representing the intuitive link between financial condition and bankruptcy; solid lines
indicate hypothesized relationships.
they would otherwise be entitled under absolute priority. Even common equity holders, the
lowest priority class, may be able to exert leverage to obtain a more favorable outcome at the
expense of higher priority claimants. Indeed, as the evidence indicates, such outcomes will
be increasingly likely as the financial condition of the firm improves (e.g., Weiss, 1990).
Given this, the underlying premise of this study is that the interrelationship between the
firm’s control characteristics and the systemic incentives of the law of reorganization out-
lined above can be expected to moderate the relationship between the financial condition
of the firm and the filing decision, as depicted in Figure 1. Specifically, control by means
of equity concentration, board composition, or creditor influence will influence the likeli-
hood of filing at different levels of solvency. Attention turns now to consideration of these
effects.
Hypothesized Relationships
Ownership control. Agency theory (Fama & Jensen, 1983a, 1983b; Jensen & Meckling,
1976) concentrates on the relationship between the owners of the firm and its managers,
using the “contract” between the two as the unit of analysis (Eisenhardt, 1989). Given
the separation of ownership from control inherent in the owner-manager relationship and
the resultant potential for both information asymmetries and goal conflicts, managerial
incentives may favor the maximization of personal utility rather than shareholder wealth
(Amihud & Lev, 1981).
To understand the implications of bankruptcy for the owner-manager relationship, recall
that Jensen and Meckling (1976) defined agency costs as the sum of monitoring costs borne
by the principal, guarantees of good behavior issued by the agent, and the loss associated
with agent decisions that diverge from the goal of the maximization of the principal’s
welfare. Thus, absent some alteration of the base contract, the manager’s expected total
return is
TM = S + (C − B), (1)
where S is the net present value of the manager’s salary, C is the net present value of
control rents (Diamond, 1993), i.e., perquisites and other benefits associated with pursuing
the agent’s, rather than the principal’s, welfare; and B is the net present value of bonding
costs, i.e., the agent’s guarantees of good behavior, which typically would be “paid” out of
foregone opportunities to maximize the value of C. Meanwhile, the owner’s expected total
return is equivalent to:
TO = V − M − T M , (2)
where V is the net present value of the owner’s proportionate residual claim on the assets of
the firm, M is the owner’s monitoring costs, and TM is the manager’s expected total return,
which otherwise could be retained in the firm to contribute to the value of V.
Given the inherent conflict between owners and managers represented by the value of
TM , agency theory argues that the base contract can be altered to include outcome-based
contracts (Eisenhardt, 1989), or, in other words, equity-based compensation (Jensen &
Meckling, 1976), which promotes coalignment between the interests of shareholders at
large and those of management. This is so because the manager with an equity interest in
the firm will receive

TM = TM + TO , (3)
which, substituting the quantities given in Eqs. (1) and (2), yields V − M. Thus, adding
equity to the managerial contract creates an affirmative incentive for managers to minimize
the value of M, owner monitoring costs, and to maximize V, the value of the owner’s residual
claim.
The same principles and relationships can be extended to the context of organizational
distress in order to predict managerial and owner behavior in the shadow of bankruptcy,
as depicted in Figure 2. The logic of Figure 2, based upon the foregoing discussion of
absolute priority violation and equity sharing, is that the likelihood of the latter increases
with improvement in the firm’s financial condition, measured either as stocks or flows.
There exists a “clearing level” of obligations (D) relative to the firm’s value (A), above
which sufficient attachable asset stocks or flows exist to provide incentives to all par-
ties to settle and provide lower priority claimants, including equity, some incremental
benefit above the absolute priority share. However, for sharing to occur, the condition
Oblig.
A
E>0
D
E=0
Asset Value
T"m T'm
Tret E
T'o
To
Tm
Figure 2. Firm asset value and total returns. A, asset value of firm (asset stock or cash flows); D, hypothetical
“clearing” level of obligations (total debt or currently due); E, excess equity recovery given A − D > 0. Returns:
TM , manager without equity; TM , manager with equity; T , manager with equity (E > 0); T , shareholder
M O
(E = 0); TO (E > 0).
A − D > 0 with respect to the true values of A and D must hold; otherwise, true value
is not sufficient to retire current or static obligations and no incentive to settle
exists.
Given this, we can derive the general form of the returns available to the immediate
parties to the reorganization. First, as shown above, managerial returns will equal either (1)
TM , if no equity interest is held, or (2) TM where managers own equity in the company.
Recall also that in the context of the reorganization process, equity may be able to extract
excess returns, which will rise or fall with the value of the firm (LoPucki, 1993; LoPucki &
Whitford, 1990, 1993a, 1993b). Thus, in reorganization, managers with equity can expect
to receive

TM = TM + E, (4)
where E is the value of the surplus recovery in excess of the absolute priority share. Because
E approaches its maximum as the financial condition of the firm increases (Weiss, 1990),
in other words, where for any given level of obligations (D) the total asset value of the
firm (A) is in excess thereof (or, possibly, not far below), equity holdings give rise to
clear incentives to file so as to maximize the quantity (A − D). This is true even if, as a
consequence of decreases in the value of the organization’s stock (V) associated with decline,
the value of TM is less than historical levels and/or decreasing; indeed, the incentive may
be greater where the latter is decreasing so that excess value can be captured before it is
dissipated.
As applied to managerial ownership, this logic suggests that when equity is concentrated
in management’s hands, management can be expected to utilize its position to file when
the firm is in relatively good financial condition so as to maximize the value of its own
recovery as well as that of shareholders at large. Where management does not own equity
in the firm, however, its expected recovery is only TM , providing no particular incentive to
file prior to a decline in the firm’s condition. Indeed, the converse is true; without the equity
position to provide a return in addition to base salary (E maximization), and without the
concomitant power to retain control post-reorganization, such executives have every reason
to avoid bankruptcy.
Another consideration that must be addressed, however, is Fama’s (1980) conceptual-
ization of the managerial labor market and the increment or decrement to total return that
might accrue to management as a consequence of changes in the value of future employ-
ment capital. Fama (1980) viewed the market for future employment as an additional control
mechanism against managerial consumption (i.e., shirking, incompetence, and perquisites).
As long as ex post settlement of current consumption occurs, that is, where deviation from
expected performance takes the form of overconsumption and is accompanied by ex post
reductions in the value of employment capital, management has no incentive to overcon-
sume. How might this affect management’s attitude toward the reorganization process?
Two alternatives present themselves: Either the bankruptcy filing is sufficiently stigmatic
(Sutton & Callahan, 1987) that post-petition employment capital is reduced and managers
therefore seek to avoid or defer the decision, or an efficient employment market (Fama,
1980), viewing a proactive reorganization petition as a means of protecting and enhancing
shareholder recovery along the lines discussed above, rewards or at least does not penalize
managers who act accordingly. Although a clear choice between these two cannot be made
ex ante, when viewed in terms of the logic derived above, any penalty or reward accruing
to the manager’s ex post employment capital should apply equally to the ownership or
non-ownership conditions. That is, managerial returns from reorganization will be either
TM (Eq. (1)) or TM (Eq. (4)), plus or minus a constant reflecting the effects of changes in the
managerial employment market. The difference between the two, assuming employment
capital effects are constant in either circumstance, is the opportunity of owner/managers to
maximize their recovery through maximization of E. Managers with equity, therefore, can
still be expected to file when the firm is in fairly good financial condition. Thus, we can
deduce that:
Hypothesis 1: Managerial equity will moderate the relationship between the financial
condition of the firm and bankruptcy: Firms in better financial condition will be more likely
to file when managerial equity ownership is high than when it is low.
The counterweight to executive ownership is the possibility of equity ownership that

is concentrated, rather than atomistic. Concentrated outside equity ownership, particularly
that held by institutions and significant block owners (Baysinger, Kosnik & Turk, 1991;
Hill & Snell, 1988), is posited to result in lower marginal monitoring costs (Alchian
& Demsetz, 1972). Thus, for such owners, and indeed equity as a class, the value of
M can be minimized, and with it, through increasing scrutiny and control, the value of
(C − B).
With respect to reorganization outcomes, the presumption here is that such concentration
is an offset to managerial holdings, such that more outside ownership necessarily implies
less inside ownership. As a consequence, power shifts in favor of the outside holders.
Consequently, outside owners can use this power to replace control rent maximizers prior
to bankruptcy (Gilson, 1989, 1990) with more compliant managers (thereby minimizing M
once more), and thereafter seek reorganization while the firm is in relatively good financial
condition so as to incorporate the value of E in their total return (Weiss, 1990). Alternatively,
they may push for a filing with or without replacement simply to recoup E rather than avoid
bankruptcy and risk significant asset value decline. In either case, filing prior the occurrence
of significant decline in financial health will maximize the value of E. Thus, concentrated
outside equity owners can expect to receive
TO = TO + E, (5)
or the owner’s expected normal recovery plus the value of excess distributions where E > 0.
Thus, such owners will seek to force reorganization when the firm is in relatively good
financial condition in order to maximize the value of E and, hence, their total return.
Thus,
Hypothesis 2: Outside equity will moderate the relationship between the financial con-
dition of the firm and bankruptcy: Firms in better financial condition will be more likely to
file when outside equity concentration is high than when it is low.
Board composition. Board composition is viewed as an information system facilitat-

ing efficient monitoring of the firm’s affairs (Eisenhardt, 1989; Fama & Jensen, 1983a;
Walsh & Seward, 1990). This study considers the effects of outside representation, investor
representation, and direct creditor representation.
To begin, outside directors are defined here as those directors who are independent of
management and/or the firm itself (Gilson, 1989, 1990). Ordinarily, such directors are
presumed to be the ideal with respect to monitoring and control of management on be-
half of shareholders (Cochran, Wood & Jones, 1985; Gilson, 1990). Although some work
has posited ambiguous effects relating to outside director dominance (e.g., Baysinger &
Hoskisson, 1990), agency theory’s predictions of the behavior of outside directors would
suggest that they will seek to minimize agency costs, i.e., the value of (C − B), or manage-
rial control rents (Diamond, 1993). Similarly, given the discussion above, a filing decision
made while the firm is relatively healthy will afford shareholders a greater opportunity to
recover some value of E (Weiss, 1990). Thus, the more outside directors on the board, the
more likely that the board will act to constrain managerial control rent appropriation, i.e.,
maximization of (C − B), and the more likely that a decision will be made to file while
the firm is in relatively better health in order to maximize the expected recovery of equity
holders.
Similar logic applies to investor board representation, where the locus of attention is the
proportion of direct representatives of significant investors holding seats on the firm’s board.
Given that these directors represent the specific interests of large stockholders, rather than
the interests of shareholders as a class, we should expect that the incentives of concentrated
outside equity ownership discussed above in connection with Hypothesis 2 should be trans-
mitted directly through these representatives, so that filing should occur when shareholders
can expect to recover some value of E. Thus,
Hypothesis 3: Outside board representation will moderate the relationship between

the financial condition of the firm and bankruptcy: Firms in better financial condition
will be more likely to file when outside board representation is high than when it is
low.
Hypothesis 4: Investor board representation will moderate the relationship between the
financial condition of the firm and bankruptcy: Firms in better financial condition will be
more likely to file when investor board representation is high than when it is low.
Given the nature of the reorganization process, creditor interests also must be considered
in any analysis of corporate control and the bankruptcy decision. Jensen and Meckling
(1976) considered the impact of debt on the firm, and suggested that the agency cost of debt
is equal to the sum of opportunity costs associated with differential investment patterns
arising from the use of debt, i.e., the prospect that managers and creditors will disagree
with respect to the nature and riskiness of projects undertaken; monitoring and bonding
costs, similar to the case with shareholders described above; and bankruptcy costs. Creditor
returns thus are equal to
TC = P + I − (A + E), if P < V − TM , (6a)
or
TC = (V − TM ) + I − (A + E), if P > V − TM , (6b)
where P is the net present value of the principal amount borrowed, I is the net present value
of the interest stream, A is the agency costs delineated above, E is the value of equity’s
surplus recovery in excess of the absolute priority value, which will be paid out of the
creditors’ share as higher priority claimants (Weiss, 1990), and V is the value of the firm’s
attachable assets for repayment of the debt. In short, creditors receive the lesser of their
principal plus interest, or asset value available for repayment plus interest if the asset value
is less than the principal sum. In either case, agency costs and equity’s settlement must
be accounted for, but so must managerial returns to the extent they are not reinvested in
the firm to maximize firm value. Thus, creditors have an incentive to minimize managerial
recovery, especially that attributable to control rent appropriation (Diamond, 1993), or the
value of (C − B). As this value increases, the likelihood of asset value decline increases
and the creditor’s principal is put at risk.
In the context of reorganization, bankruptcy costs are likely to be similar whether the
firm is in good condition or not, and the other agency costs may or may not be controllable
in bankruptcy, as was outlined above. The issue for creditors, therefore, will be the value
of E compared to the value of TM , particularly the value of (C − B), and V . As Eqs. (6a)
and (6b) imply, creditors will be better off paying E if it is less than (V − TM )− P, or the
amount by which the asset value exceeds the principal sum and therefore assures repay-
ment. Otherwise, they receive less than their principal amount and are worse off even if
they avoid paying E. Thus, again, creditors have an incentive to seek an early resolution of
financial distress, thereby conserving asset value and minimizing managerial control rent
appropriation.
Returning to the question of creditor board representation, board members with direct
ties to creditors with these incentives will seek to ensure that the creditors’ returns are
maximized, consistent with the agency theoretical predictions set forth above for equity
holders and their direct representatives on the board (Fama & Jensen, 1983a; Jensen &
Meckling, 1976). To the extent these representatives acquire seats on the firm’s board, then,
filing is likely to be preferred when the financial condition of the firm is relatively good.
Thus,
Hypothesis 5: Creditor board representation will moderate the relationship between

the financial condition of the firm and bankruptcy: Firms in better financial condition
will be more likely to file when creditor board representation is high than when it is
low.
Creditor control. Regardless of board representation, secured creditors and the holders
of short-term, or current, indebtedness of the firm are likely to be able to influence the
bankruptcy decision. Secured creditors are among the highest priority claimants against the
bankrupt organization, and thus can exert substantial leverage against management merely
by virtue of the threat of asset liquidation (Mann, 1997a, 1997b; Scott, 1997). Likewise,
short-term creditors possess significant power over the debtor and can act to enforce their
control prerogatives as the price for any subsequent extension of the term of the indebtedness
(White, 1989). The price of the firm’s failure to accede to such demands is immediate default
and a probable liquidity crisis. From an agency theoretical perspective, as delineated in the
previous section and indicated by Eqs. (6a) and (6b), the positions of these creditors will be
analogous to that of concentrated equity, such that higher amounts of secured or short-term
debt will correspond to increased monitoring potential (Alchian & Demsetz, 1972) and
incentives to avoid extended decline. Thus, both secured creditors and the holders of the
firm’s short-term indebtedness are likely to see their prospective recovery maximized by an
acceleration of the filing decision.
Hypothesis 6: Secured debt will moderate the relationship between the financial condi-
tion of the firm and bankruptcy: Firms in better financial condition will be more likely to
file when the percentage of secured debt is high than when it is low.
Hypothesis 7: Short-term debt will moderate the relationship between the financial con-
dition of the firm and bankruptcy: Firms in better financial condition will be more likely to
file when the percentage of short-term debt is high than when it is low.
Methods
Sample
The sample for the present study is comprised of firms experiencing financial distress
between 1990 and 1996, inclusive, years during which bankruptcy activity was significant
enough to make examination feasible. In developing the bankrupt firm sample, I relied upon
the Bankruptcy Yearbook and Almanac (e.g., Daily, 1996), an annual publication of New
Generation Research that provides a compendium of major bankruptcy developments and
filings. Companies included in the sample were limited to those filing Chapter 11 petitions
for reorganization, and additionally to those with publicly traded equity, as opposed to those
with only publicly traded debt or those otherwise subject to public reporting obligations.
Nonfiling firms presented a unique identification challenge. Previous studies (e.g., Daily,
1995, 1996; Daily & Dalton, 1994a, 1994b, 1995) often have constructed a matched sample
on the basis of SIC code and various measures of firm size. While valid for investigation of
the specific issues addressed by those studies, this methodology does not ensure identifica-
tion of a sample of equally distressed nonfiling firms. For example, an acceptable match for
America West Airlines, based upon size alone, might have been Southwest Airlines. Even
closer matches on size include companies with only slightly more than half as much debt
as carried by America West.
Accordingly, using Compact Disclosure and CompuStat as data sources, I employed
a matching protocol based upon each bankrupt firm’s primary three- or four-digit SIC
code and debt-to-asset ratio in the filing year. These measures permit comparison between
bankrupt and nonbankrupt companies on the basis of firm size and industry, and therefore
environmental, conditions, as was true of the previous research (Daily, 1995, 1996; Daily &
Dalton, 1994a, 1994b, 1995). However, by incorporating the debt-to-asset ratio as a measure
of financial distress (Flagg et al., 1991), this study limits the comparison to those firms sim-
ilarly situated to the bankrupt firms with respect to leverage. A match was considered valid
on this variable if the surviving firm’s debt-to-asset ratio was within five percentage points
of that of the bankrupt firm, regardless of size. Outside that range, size was incorporated as
an additional guide to the match, with preference given in all cases to the closest leverage
match available unless a closer match on size yielded only a slight difference in lever-
age when compared with the preferred target. A post-identification validity check revealed
that no statistically significant difference in size or leverage existed between the two sets
of firms.
In several instances, no valid matches on these measures existed, and accordingly the
bankrupt firm was excluded from the sample. However, where matches were identified, I
cross-checked against the Bankruptcy Almanac’s lists of bankruptcies in both preceding and
subsequent years to ensure that the match was not itself either a reorganized firm currently
operating outside of bankruptcy or a firm that entered bankruptcy within three years of the
sample window. Where such was the case, the prospective match was excluded and a new
match was sought. This procedure resulted in a total sample of 220 firms, comprised of
110 bankrupt firms and 110 nonbankrupt firms. A list of the sample firms is included in
the appendix, a brief examination of which will show the diversity of firms and industries
represented.
Variables
Data were collected for the year preceding the filing year in order to facilitate isolation of
the factors contributing to the decision made in the subsequent year (Daily, 1995; LoPucki
& Whitford, 1993b). All data were obtained from firm 10K reports, proxy statements, and
the CompuStat and Compact Disclosure databases.
The dependent variable, of course, is the bankruptcy decision, a dichotomous measure
coded as 0 for the nonfiling firms and 1 for the bankrupt firms (Daily, 1995, 1996; Daily &
Dalton, 1994a, 1994b, 1995; Hambrick & D’Aveni, 1988). Previous studies (Daily, 1995;
Daily & Dalton, 1994a, 1994b) have employed measures of firm size, principally the natural
log of total assets (Singh, 1986), and this variable was utilized in the present study as well.
Liquidity also was introduced as a control (Daily, 1995; Daily & Dalton, 1994a, 1994b;
Flagg et al., 1991). I used two measures, cash and cash equivalents as a percentage of total
assets, and current assets as a percentage of fixed assets, in order to capture the notion of
investment balance posited by some to explain bankruptcy (Platt, 1985). According to this
view, either over- or under-investment in liquid or fixed assets may result in a mismatch
between the organization and the demands of its environment.
Financial condition represents the primary term used in conjunction with all of the mod-
erator variables. Because the primary focus here concerns the interaction of control with fi-
nancial condition, and because the relationship between financial condition and bankruptcy
sometimes is viewed as a tautology (Kallen, 1991), a separate hypothesis for this effect
is not included. However, its evaluation in the baseline model does present a de facto
test of the basic relationship between financial condition and filing. Based upon the con-
cept of equitable insolvency, defined as the ability to pay debts as they mature (Warren
& Westbrook, 1986), I calculated the difference between the firm’s operating cash flow
(EBIT + depreciation − taxes) and interest expense (Ross, Westerfield & Jordan, 1993).
In order to normalize for firm size, I divided the result by total assets. This measure also
avoids any direct overlap with firm leverage, which was utilized as a matching variable.
The remaining variables represent different loci of corporate control. Equity holdings of
corporate insiders and unaffiliated outsiders, particularly institutional investors and signifi-
cant block owners, were entered as percentages of total equity outstanding (Baysinger et al.,
1991; Boeker, 1992; Gilson, 1990; Hill & Snell, 1988). Board composition was broken into
three categories: general outside representation, defined as those directors without present
or past affiliations with the company (Hoskisson, Johnson & Moesel, 1994); investor repre-
sentation, defined as those directors with ties, typically based on employment, to an equity
investor (Gilson, 1990); and creditor representation, defined similarly (Gilson, 1990). All
were entered as percentages of total board membership. Finally, the capital structure vari-
ables, secured indebtedness and current indebtedness, were entered as percentages of the
firm’s total liabilities. These measures capture the notion of pressure-intense claims against
the company (Mann, 1997a, 1997b).
Analyses
The use of a categorical dependent variable suggested the efficacy of logistic regression,
a technique utilized in previous bankruptcy studies (e.g., Daily & Dalton, 1994a, 1994b;
Hambrick & D’Aveni, 1988). Tests of model significance proceeded hierarchically by com-
paring a baseline model, including only singular terms, to the control model, and then by
comparing a model incorporating the interaction terms to the baseline model in order to as-
sess incremental contribution to model fit (Daily & Dalton, 1994a, 1994b). This comparison
is based upon the change in obtained −2 log likelihood, a measure that closely approxi-
mates a χ2 distribution (Menard, 1995), as well as the observed change in the Nagelkerke
R2 measure, from which an F-statistic can be derived when comparing models. Where a
significant moderated relationship appeared, the form of the relationship was determined
using Jaccard, Turrisi and Wan’s (1990) decomposition technique (see also Carpenter &
Fredrickson, 2001).
As an additional validity check, a post hoc control test also was performed to parse the
effect, if any, of the lag between the close of the sample firms’ fiscal years, and hence the
reporting of the data used in this study, and the date of the bankruptcy filing. I identified the
bankruptcy date for each of the filing firms and measured the number of months between
that date and the close of the fiscal year for which data had been gathered for both filers
and nonfilers. The resulting variable then was included as an additional control term, and
all tests described above were repeated incorporating the new measure. No change in the
substantive results reported below was observed.
Results
Table 1 reports the bivariate correlations and descriptive statistics for the variables used
in the study. A separate MANOVA analysis confirmed the lack of significant differences be-
tween filing and nonfiling companies with respect to firm size and leverage, the quantitative
match criteria.
As reported in Table 2, the baseline model (Model 2) significantly increments the control
model ((−2LL) = 50.436, p < .001; F = 7.861, p < .001). This result provides the
predicate to test the interaction model (Model 3), and again the increment to the −2LL
statistic is highly significant ((−2LL) = 24.428, p < .001), as is the increment to the
model F-value based upon the change in the Nagelkerke R2 coefficient (5.298, p < .01).
Thus, the conditions establishing the presence of a moderated relationship are satisfied,
and individual product terms can be evaluated for significance and the precise form of the
interaction with firm financial condition.
Models 2 and 3 also reveal information concerning the relationship between financial
condition and bankruptcy that bears mention. In the baseline model (Model 2) incor-
porating all of the singular terms, financial condition is negative and significant (b =
−.010, p < .01), while in the interaction model (Model 3) its coefficient is positive
and significant (b = .038, p < .05). The former is consistent with the general view of
the relationship between firm financial condition and the incidence of bankruptcy. The
latter raises methodological issues concerning whether, and how, to interpret a singu-
lar term coefficient that also comprises one or more interaction terms. Jaccard, Turrisi
and Wan (1990) summarize the distinction between the two model coefficients thusly:
“[I]n the ‘main effects’ model, the coefficients estimate ‘general’ relationships at each
level of the other independent variable, whereas in the product-term model, they
252
W.J. Donoher / Journal of Management 2004 30(2) 239–262
Table 1
Correlations and descriptive statistics
Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12
1. File (dichotomous)a .500 .501 1.000

2. Assets (logn) 6.00 1.25 −.038 1.000
3. Cash + equiv./assets .065 .075 −.020 .154∗ 1.000
4. Current assets/fixed .486 .256 .042 −.072 .311∗∗∗ 1.000
5. Financial condition −.088 1.04 −.092 .055 −.012 .080 1.000
6. Inside equity pct. 21.4 22.3 −.102 −.224∗∗∗ .098 .085 .055 1.000
7. Outside equity pct. 44.3 26.2 −.071 .264∗∗∗ −.032 −.024 −.012 −.636∗∗∗ 1.000
8. Outside board pct. .556 .202 .011 .182∗∗ −.077 −.074 −.027 −.439∗∗∗ .323∗∗∗ 1.000
9. Investor board rep. .132 .186 −.017 −.030 −.035 −.102 .017 −.313∗∗∗ .451∗∗∗ .186∗∗ 1.000
10. Creditor board rep. .044 .115 −.080 −.063 −.022 −.070 −.036 −.138∗ .066 −.023 .412∗∗∗ 1.000
11. Secured debt pct. .243 .251 .137∗ −.210∗∗ −.199∗∗ −.234∗∗∗ −.074 .072 −.182∗∗ −.079 −.007 −.014 1.000
12. ST debt pct. .549 .285 .191∗∗ −.031 .313∗∗∗ .412∗∗∗ −.122+ −.021 −.008 −.005 .021 .000 −.135∗ 1.00
N = 220.
a Coded as 0 = no filing, 1 = filing.
+ p < .1.
∗ p < .05.
∗∗ p < .01.
∗∗∗ p < .001.
Table 2
Results of hierarchical logistic regression analyses
Variable Model 1 Model 2 Model 3
Step One (Controls)
Assets (logn) −.048 .199 .256
Cash + equivalents/assets −.808 2.362 −2.362
Current assets/fixed .385 .034 .008
Step Two (Baseline)
Financial condition −.010∗∗ .038∗
Inside equity percentage −.031∗∗ −.031∗∗
Outside equity percentage −.019∗ −.012
Outside board percentage −.676 −1.099
Investor board representation .548 .472
Creditor board representation 2.502+ −2.520
Secured debt percentage 1.215∗ 1.624∗
Short-term debt percentage 1.306∗ 1.417∗
Step Three (Interactions w/Fin. Condition)
Inside equity percentage −.001∗
Outside equity percentage .001∗
Outside board percentage .001
Investor board representation .005
Creditor board representation −.022
Secured debt percentage −.044∗
Short-term debt percentage −.039∗
Nagelkerke R2 .005 .236 .355
R2 .231 .119
F-statistic 7.861∗∗ 5.298∗∗
−2 log likelihood 304.149 253.713 229.285
(−2LL) 50.436∗∗∗ 24.428∗∗∗
Classification percentage .500 .667 .681
Dependent variable = filing (1 = file, 0 = no file). N = 220. Coefficients are unstandardized. Model comparisons
for F-values and −2LL change are between control model (Model 1) and main effects model (Model 2), and
between main effects model (Model 2) and interaction model (Model 3).
+ p < .10.
∗ p < .05.
∗∗ p < .01.
∗∗∗ p < .001.
estimate conditional relationships . . . where all X variables but the one in question equal
zero” (1990: 27). Thus, the general relationship between financial condition and filing is
negative, while the conditional relationship, found where the values of ownership, board,
and debt variables are zero, is positive. The latter is an unlikely event, but the finding
is interesting because it suggests that, in the theoretical absence of all indicia of control,
firms would tend to file in generally better condition than when certain control parties
are present. The pattern of findings discussed below indicates the sources of this out-
come.
Ownership Control
Hypothesis 1 argued that filing firms with high levels of inside equity ownership will
file in better condition than those with low inside equity ownership. The interaction term
itself is statistically significant (b = −.001, p < .05), indicating the presence of a mod-
erated relationship. Individual variable coefficients for the singular financial condition and
inside equity terms both are significant (b = .038, p < .05 and b = −.031, p < .01,
respectively).
Similarly, Hypothesis 2 anticipated that firms with high levels of outside ownership
concentration would file when their financial condition was better than firms with low
levels of outside ownership concentration. Table 2 again indicates the presence of a sig-
nificant interaction term (b = .001, p < .05), as well as significant singular term coeffi-
cients.
The specific form of these interactions was evaluated using the Jaccard, Turrisi and Wan
(1990) decomposition technique, hereinafter referred to as “JTW.” Contrary to the pre-
cise formulation of Hypothesis 1, filing firms with higher levels of inside equity actually
are in worse financial condition than those with lower levels of inside equity. The same
holds true for nonfiling firms, although the difference between the two is much less in
this instance than is true of the filing firms. Thus, although the prediction of Hypothesis
1 regarding the presence of a moderated relationship holds, the actual form of that re-
lationship is opposite that predicted by an agency theoretical framework. Hypothesis 1,
therefore, is not supported. By contrast, Hypothesis 2 is supported. Filing firms with high
levels of outside equity concentration are in better condition than those with lower lev-
els of outside equity concentration, albeit by a smaller margin than is true of nonfiling
firms.
Board Control
Hypothesis 3 predicted that high levels of outside board representation would lead the
firm to file in better financial health than would be the case at low levels of outside board
representation. As indicated in Table 2, the product term coefficient for outside board rep-
resentation is not significant. Thus, no support exists for Hypothesis 3. Hypotheses 4 and 5,
which examined the effects of investor and creditor board representation, respectively, also
must be rejected. Neither product term coefficient is significant at the .05 level.
Moreover, Table 2 indicates that none of the board composition variables achieved sig-
nificance at the .05 level even when considered as main effects in Model 2. Only creditor
representation achieves even minimal significance in that model (b = −2.502, p < .10).
Thus, the pattern of results disclosed in Table 2 suggests that, for this sample, compo-
sition of the board of directors played no role in determining the outcome of the filing
decision.
Creditor Control
Hypotheses 6 and 7 predicted that firms with high levels of secured and short-term in-
debtedness, respectively, would reorganize in better condition than would be true of firms
with low levels of these variables. In Model 3, both product term coefficients are signif-
icant (b = −.044, p < .05 and b = −.039, p < .05, respectively), justifying further
investigation for the form of the interaction using the JTW technique. Surprisingly, this test
reveals that, as was true of inside equity ownership, the interaction of secured indebtedness
and financial condition is opposite that hypothesized, with filing firms slightly worse off
given high levels of such debt, albeit solvent in both states. Nonfiling firms also were in
poorer financial condition at high levels of secured debt than at low levels, and actually were
insolvent in the former condition. Thus, although filers were better off at higher levels of
secured indebtedness as compared to nonfiling firms, the financial condition of low secured
debt filers exceeded that of high secured debt filers, and Hypothesis 6 must, accordingly, be
rejected.
With respect to Hypothesis 7 and the effects of short-term debt, JTW decomposition
reveals that the expected relationship obtains. Specifically, filing firms with high levels
of short-term indebtedness are in better financial condition than firms with low levels
of short-term indebtedness. The precise form of the interaction with respect to the ef-
fects of short-term indebtedness on the decision to file is borne out, and Hypothesis 7 is
confirmed.
Discussion
This research investigated the moderating influences of governance and capital structure
on the relationship between the financial condition of the firm and bankruptcy. Hypothesis 1
examined the impact of inside equity ownership on the bankruptcy decision. The relationship
between the financial condition of the firm and filing is moderated by the extent of inside
equity holdings, but not in the direction anticipated. Contrary to the agency theoretical
basis of the hypothesized relationships, managers with significant equity stakes appear to
file in exceedingly poor financial condition, notwithstanding the potential to gain from
reorganizations undertaken when the firm is in better shape, as provided in the theoretical
derivation of the model.
It is important to note here the implications of these findings for governance and the sug-
gestion that managerial equity ownership should be promoted as a general matter (Jensen
& Meckling, 1976). Indeed, the notion that equity may share in a reorganization settle-
ment to a greater extent than strict adherence to absolute priority would permit should be
a positive development consistent with good governance. The results of this study, how-
ever, suggest that managers with equity stakes may be reacting more to the current and
potential benefits of their positions than to any financial incentives relating to their owner-
ship. In short, even though these managers would benefit from a proactive reorganization
to the extent of their equity holdings, as would external shareholders, they appear to resist
filing. Critically, only they benefit from the failure to reorganize to the extent they con-
tinue to receive, if not maximize, the value of TM , or salary, bonuses, and perquisites.
Even though, as noted above, maximization of TM means that TO , the owners’ return
component, is reduced in Eq. (4), apparently this group of managers believed that per-
petuation, if not maximization, of the former more than offset decreases in the latter. To
this extent, then, the evidence of this study can be seen as corroborative of Sutton and
Callahan’s (1987) findings regarding the stigmatic effect of bankruptcy on executives’ fu-
ture reputations. Indeed, in terms of Fama’s (1980) analysis, the results imply that, at least
as perceived by these managers, the anticipated value of E, or equity sharing, must be
greatly offset by the prospective negative change in the value of the manager’s employment
capital.
If so, is the market for employment inefficient? Recall that Fama (1980) proposed that
under conditions of full ex post settlement managers would not overconsume, because do-
ing so would be expected to result in countervailing changes in the value of their future
employment capital. Therein lies the key, perhaps, to understanding the dynamic revealed
by the results of this study: the assumption of full ex post settlement is violated. “When
a manager does not expect to be in the labor market for many future periods, the weight
of future wage revisions due to current assessments of performance may amount to sub-
stantially less than full ex post settling up” (Fama, 1980: 298). Thus, managers who expect
that filing for reorganization, even when undertaken at a time that would benefit share-
holders as a class, will terminate or severely constrain their careers have every incentive to
attempt to recoup the future value of lost employment capital from current owners. Even
if these managers are themselves owners, the clear implication is that the “benefit” of cur-
rent consumption is greater than the sum of lost employment capital and lost shareholder
value.
Taken as a whole, this study’s findings suggest that high managerial equity may result
in entrenchment sufficient to forestall replacement by outside parties and an executive
mindset unwilling to risk employment potential by seeking reorganization at a time when
something could yet be salvaged. More research into the dynamics of these processes,
including their interactions with one another, is necessary, but the results represented herein
must be troubling for all concerned with governance, especially in light of the spate of
recent disclosures of managerial misbehavior.
Likewise, findings regarding the impact of the board of directors are not promising from
an agency theoretical perspective. Directors seem not to be proactive in the reorganization
process, although it may be the case that they respond to the agendas of owners and creditors
with respect to the filing decision. Directors’ apparent lack of initiative may, as was true of
the inside equity findings, reflect concern for reputational impairment and the loss of future
employment capital (Fama, 1980). This interpretation is consistent with Gilson’s (1989,
1990) empirical findings with respect to the incidence of board member displacement and
the diminished employment prospects of directors of bankrupt firms.
The creditor control results sent mixed messages. The hypothesized effect of creditor
influence was true only in the case of short-term indebtedness. Secured creditors, by con-
trast, were associated with poorer financial condition among both filing firms and non-
filers. Although the difference was minimal with respect to filing firms, and although
these firms were actually solvent at the time of filing, the results suggest the absence
of the pressure intensity assumed by the hypothesized relationship. Part of this effect
may reflect the legal position of these creditors, because the nature of their secured sta-
tus presents a lower risk of loss, even among the worst firms, than that faced by many
of the short-term creditors. In other words, with their position somewhat protected, se-
cured creditors do not actively seek or pressure the firm to undergo reorganization. On
the other hand, such results may also reflect reverse causality: Firms in poorer condition
may be the only ones systematically required to provide collateral as a condition of obtain-
ing financing. By contrast, short-term creditors include, by way of example, unsecured
trade creditors who, although wielding leverage by virtue of the threat of nonrenewal
and repayment demand, lack the legal entitlements and protections of the secured cred-
itors. Therefore, these creditors are more likely to seek reorganization when gains can be
achieved from surplus asset value. In any case, the results point to a need for additional
research into the dynamics of creditor-firm relationships, as well as the prospect of inter-
creditor conflict. Just as different shareholder groups may have different motivations and
agendas (e.g., Ramaswamy, Li & Veliyath, 2002), so too may creditors, as these findings
imply.
The overall pattern of results also suggests a need to probe the differences between
incentive alignment, representational control, and direct control. The findings for out-
side equity and creditor control imply that where parties with a direct financial interest
in the affairs of the firm, other than managers themselves, can assert control, filing oc-
curs when the company is in better shape and before managers can reap excess control
rents. These results suggest that shareholders and creditors must amass sufficient power
to exert a proactive influence on the decision-making process of distressed organizations;
counting on managerial equity stakes alone apparently is not enough. That board represen-
tation had no apparent influence on the filing decision may corroborate this interpretation,
for board seats may be too difficult to obtain, at least in a timely fashion, to constrain
managerial consumption (Fama, 1980). Assertion of direct control as a function of owner-
ship or financial leverage, including the ability to ensure managerial displacement and to
steer the organization through reorganization, may be seen as the more efficient means of
control.
As is true of any empirical work, this study has certain limitations inherent in its design.
The use of cross-sectional data does not permit assessment of temporal effects, nor does
it permit us to gauge the extent or rapidity of decline. It may be the case, for example,
that boards act proactively at earlier stages of firm decline or that they respond to different
rates of decline. Likewise, the other variables may reflect different patterns of control or
incentive effects at different stages of firm decline. Again, this study’s emphasis on the
effects present within the decision timeframe does not permit reflection on these issues, all
of which remain open for future research. The study’s findings do, however, suggest the
possibility of interesting extensions along these lines.
Generalizability of the study also represents something of a limitation, in that the sample’s
emphasis on, and comparison of, distressed organizations does not permit us to apply the
lessons learned here to healthy firms, at least not automatically. On the other hand, the
study’s purpose was to investigate incentive and control mechanisms in distressed organi-
zations, and to this extent it makes a contribution by developing and testing a theoretical
model built upon the assumptions of effective control of healthy or well-run organizations.
This represents a departure from and extension of the existing literature, which had not
focused specifically upon the context of distress or provided a theoretical rationale, incor-
porating the systemic incentives of the law, for the effects of control on the reorganization
decision.
Consequently, the evidence of this study suggests a need to carefully reexamine agency
relationships in distressed organizations. If bankruptcy law is operating to alter the ex ante
contracting process, then a generalized allegiance to the prescriptive tenets of agency theory
with respect to coalignment may lead to perverse results. Indeed, this cautionary note is
one of the significant contributions of this study. Additional research will be necessary in
order to determine clearly the dynamics involved and the scope of the problem, but these
findings suggest a starting point.
Conclusion
This research investigated the bankruptcy decision using a matched-pair sample of

bankrupt and nonbankrupt companies. The latter were selected explicitly on the basis that
their leverage and industry membership reflected that of their bankrupt peers, a comparison
that previous research had not addressed. Results of the study indicate that firms with high
levels of outside equity holdings and current indebtedness seek reorganization in compara-
tively good financial condition. Conversely, firms with high levels of inside equity ownership
and secured indebtedness ostensibly do not do so. No effects were observed with respect to
board representation. These findings broaden our understanding of organizational failure,
as well as the nature of governance in declining firms, even as they provide a basis for ad-
ditional exploration into relationships between organizational decline and capital structure
choice, control struggles in failing firms, and resource utilization and development among
such organizations.
Acknowledgments
The author wishes to thank Rick Johnson, Al Bluedorn, Dan Greening, Doug Moesel,
Dan Turban, Bob Lawless (Boyd School of Law, University of Nevada at Las Vegas),
and three anonymous referees for their kind support, assistance and comments during the
development of this article.
Appendix A
Sample Firms
Year Bankrupt Match Year Bankrupt Match Year Bankrupt Match
1990 Ames Dept. Stores Dillard Dept. Stores 1992 HomeFed Corp. Coast Savings Finl. 1994 Memorex Telex Encore Comp. Corp.
Circle K American Stores Wang Laboratories, Inc. Control Data Merry-Go-Round Cato Corp.

Lone Star Industries Ameron Inc. Gaylord Container Stone Container Resorts Intl. Shoney’s
Prime Motor Inns Caesar’s World Kinder-Care Learning Ctrs. Rocking Horse Ctrs. Westmoreland Coal Nerco Inc.
BankEast Corp. Advanta Corp. Child World Hook SuperX 1995 Bradlee’s Pamida Holdings
Fairfield Communities Riverside Group Edisto Resources Atmos Energy Caldor Neiman Marcus
Doskocil Erly Industries Intermark C-Tec Corp. Edison Bros. Ross Stores
Salant Fruit of the Loom Oxford Energy United Cities Gas Fretter Tops App. City
United Merch. & Mfg. DWG Corp. Sudbury Inc. Lyondell Petrochemical ICH Amer. Bankers Ins.
Vestron Turner Broadcasting Highland Superstores Trans World Music TWA US Air
Amdura Triad Systems Balfour Maclaine Corp. Dibrell Brothers Clothestime Stein Mart
Siliconix AEL Industries Alexander’s Inc. Consolidated Stores Rexon Autotote Corp.
1991 First Exec. Corp. Continental Corp. Hadson Corp. Bindley Western Smith Corona Key Tronic
First Capital Holdings Conseco Barry’s Jewelers Inc. Perry Drug Stores 1996 Anacomp Inc. Datapoint
Columbia Gas Arkla Brendle’s Inc. Fay’s Inc. Ben Franklin Stores Alliance Ent. Corp.
Statewide Bancorp Bankatlantic Finl. Marcade Group Warnaco Group Best Products Bon Ton
El Paso Electric Tucson Elect. Pwr. Savin Corp. Amplicon Inc. Dep Corp. Alfin Inc.
America West West Air 1993 AM International Fedders Corp. Fruehauf Coltec Industries
Orion Pictures Corp. MGM/UA Comm. BSD Bancorp First Natl. Corp. (Cal.) Gander Mtn. Inc. Sears
US Home Turner Corp. Great Am. Communications Outlet Communications Marvel Entertnmt. Houghton Mifflin
Koger Properties Catellus Develpmt. Gulf USA Forest City Enterprises Morrison Knudsen Terex
Forum Group Geriatric & Med. Ctrs. JWP Inc. Amphenol Corp. Neo Star Ret. Group Campo Electronics
Eagle-Picher Industries Sealed Air Leslie Fay Kellwood Presidio Oil Kelley Oil & Gas
Midway Airlines Conquest Airlines Live Entertainment Merisel Inc. Sizzler Interntl. Buffets Inc.
Rexene LSB Industries Rose’s Stores Dayton Hudson
Bonneville Pacific California Energy Ladish Co. Inc. Roadmaster Industries
National Convenience Stores Seaway Food Town Angeles Corp. Hillhaven Corp.
Leisure Technology Peters (J.M.) Co. Calton Inc. PHM Corp.
Lionel Corp. Safecard Services Cherokee Inc. Signal Apparel
Telesphere Communications ALC Comm. Emerson Radio Corp. Comptronix Corp.
WTD Industries APL Corp. Hexcel Corp. Trinova Corp.
259
Centennial Group Grubb & Ellis Jamesway Corp. Microage Inc.
Monarch Capital Foundation Health MEI Diversified Unitog Co.
260
Appendix A (Continued)
Year Bankrupt Match Year Bankrupt Match Year Bankrupt Match
TIE/communications Inc. Esterline Corp. Telemundo Group Inc. Infinity Broadcasting Corp.
Divi Hotels Pratt Hotel Corp. Value Merchants Inc. Oshman’s Sporting Goods
Russ Togs Farah Action Auto Rental Inc. Pacific Intl. Services Corp.
Infotechnology Knogo Endevco Inc. Cascade Natural Gas Corp.
Ironstone Group Cruise America Gantos Inc. Jacobson Stores
Mr. Gasket Donnelly Corp. Hawaiian Air Worldcorp Inc.
Paul Harris AnnTaylor Stores Keene Corp. Trico Products
Riverbend International American Rice Rymer Foods Pilgrim’s Pride
Newmark & Lewis Heilig Meyers 1994 Crystal Brands Hartmarx
Blue Diamond Coal Addington Res. House of Fabrics Home Shopping Network
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William J. Donoher is Assistant Professor of Management at Bradley University. He re-

ceived his Ph.D. from the University of Missouri-Columbia, and holds a J.D. from
Washington University in St. Louis. His current research interests include corporate
governance, organizational distress and bankruptcy, and the legal environment of business,
including issues at the intersection of law and business.

Donoher 2004

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Journal of Management 2004 30(2) 239–262

To File Or Not To File? Systemic Incentives,

∗Tel.: +1-309-677-3715; fax: +1-309-677-3348.

0149-2063/$ – see front matter © 2003 Published by Elsevier Inc.

Theory and Hypotheses

The Chapter 11 Process

Equity Ownership Board Composition

The counterweight to executive ownership is the possibility of equity ownership that

Board composition. Board composition is viewed as an information system facilitat-

Hypothesis 3: Outside board representation will moderate the relationship between

Hypothesis 5: Creditor board representation will moderate the relationship between

1. File (dichotomous)a .500 .501 1.000

This research investigated the bankruptcy decision using a matched-pair sample of

W.J. Donoher / Journal of Management 2004 30(2) 239–262

William J. Donoher is Assistant Professor of Management at Bradley University. He re-

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