Bankruptcy Reorganization of Small Firms: Asset Specificity of Insolvent Firms

An insolvency regime encourages efficient resolution of healthy firms on a going-concern basis rather than liquidation. This paper evaluates the post-resolution outcome of small insolvent firms in a recent filings dataset year of 2024. It relates the outcome to information asymmetricity, misclassification, and inefficient mechanism leading to value loss of viable firms. It constructs a firm-level asset specificity index using three components of standardization, durable life, and re-usability. It introduces the index in a value loss model and finds that the index’s significance in explaining the nature of value loss. It covers losses to liquidated amount, re-sale amount. The robustness tests involve evaluating the total errors after reclassifying the resolved firms assigning new tags. We find significant reduction in value losses and improvement in recovered amount. The implications pertain to improved ex-post efficiency and objective assessment and value preservation of small bankrupt firms for all stakeholders.