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 indebtedness 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.
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