This report explores the efficiency of corporate rehabilitation under the “Debtor Rehabilitation and Bankruptcy Act”, the equivalent of Chapter 11 in the US, using 1,530 hand-collected bankruptcy filings made by external financial audit corporations in Korea from 2006 through 2020. The empirical analysis of this report centers around the characteristics of authorized filings, corporate reorganization process itself, financial performance post exit, and the relation between the types of corporate distress and the mode of exit.
The main results of the analyses are as follows. First, the corporate rehabilitation appears to successfully screen the inflow of distressed companies with low turnaround potential. Second, post-exit financial performance did not improve compared to pre-filing performance for the five years post exit. Third, debt-asset ratio of the authorized filings which exited through capital structure readjustment seems to have been sufficient implying corporate reorganization was efficient in its intrinsic role. Fourth, the mode of exit was consistent with the types of corporate distress, i.e., the firms with business distress and marginal firms exited more through M&A than through capital structure readjustment and the firms with financial distress and non-marginal firms exited more through capital structure readjustment than through M&A, consistent with asset redeployment role of corporate rehabilitation.
Enhancing the efficiency of corporate rehabilitation requires the followings. First, systematic turnaround of marginal firms though corporate reorganization is difficult, therefore it is advised that marginal firms are induced to go through preemptive M&A or that the plan of reorganization gets endorsed on the condition that the firms go through asset sale. Second, management and creditors need to be incentivized for active restructuring and value enhancement through devices such as equity buy-back options and strengthened creditor rights and monitoring. Third, provision of post exit public financing is necessary for proper turnaround of newly exited firms for the first few post exit years when private capital is scarce. Fourth, acquisition demand in the capital markets for firms in corporate reorganization, one of the main driving forces for efficient corporate restructuring and asset redeployment, should be heightened.