Chapter 11 bankruptcy outcomes and gubernatorial election cycles

• Chapter 11 bankruptcy cases are more likely to result in emergence when decided shortly before a gubernatorial election in which the incumbent governor is seeking re-election. • Firms emerging from bankruptcy during this period face a lower likelihood of long-term survival. • Gubernatorial interference tends to increase facing high local unemployment rates. • Gubernatorial influence is stronger when the bankruptcy judge’s political ideology aligns with that of the governor and weaker when the bankruptcy case is adjudicated in a different state. We find that Chapter 11 bankruptcy cases are more likely to result in emergence if decided shortly before a gubernatorial election, where the incumbent seeks re-election. However, firms emerging from bankruptcy during this period have a lower chance of long-term survival. This suggests that governors promote the survival of bankrupt firms, even those without a sustainable business model, to enhance their re-election prospects. Governors support bankrupt firms by influencing court decision-makers – particularly judges. A key motive for such gubernatorial intervention is to secure the votes of employees affected by bankruptcy.