There’s a sizable gap between what a company is worth in liquidation and what it’s worth while still operating, according to University of California at Berkeley’s Amir Kermani and Chicago Booth’s Yueran Ma. Companies going through Chapter 11 restructuring are worth about twice as much when they are going concerns rather than liquidated, they write.

The finding is part of a larger study of corporate debt, in which Kermani and Ma examine the size and composition of the debt loads held by nonfinancial companies. They distinguish between asset-based debt (issued against discrete assets) and cash flow–based debt (issued against the operating value of a company). In doing so, they wondered about companies’ cash-flow and asset values—essentially, how much more a company might be worth alive rather than dead.

It took the researchers more than a year to amass the data needed to answer the question. They hand-collected information from 387 public, nonfinancial companies that filed for Chapter 11 restructuring between 2000 and 2016, plus pulled from other databases including Compustat.

Assessing the value of assets took quite a bit of effort, Ma says. She and Kermani were able to find comprehensive appraisals that were disclosed in court cases. They also performed extensive checks using data from other sources.

Nonfinancial companies’ assets may fetch little value on a stand-alone basis if liquidated, they conclude. Some specialized equipment—for example, a machine used to manufacture pharmaceuticals—might not have much of a market outside of that industry and can’t be easily repurposed. Even if there is a willing buyer, moving the equipment can be costly and eat up value. Some assets, such as restaurant inventory, may also have short shelf lives and depreciate quickly.

The researchers estimate that, on average, the combined liquidation value of fixed assets, inventory, and receivables is 23 percent of the total book value of an average nonfinancial company—or 44 percent if cash holdings are included. Either way, it’s far less than 81 percent, which is the average amount recovered in Chapter 11 for going concerns.

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The gap varies across industries. Companies’ liquidation values are higher in industries such as transportation, wholesale/retail, and hotels than they are in most other sectors. Liquidation values tend to be much lower in other industries because not only may some companies’ assets be immobile and specialized, but those companies may benefit from organizational capital, such as employees’ ability to innovate, that will be lost in liquidation.

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To realize the full value of a company that continues operating, creditors need to understand the business and be able to oversee it effectively and possibly discipline its managers, the researchers argue. To some extent, this can happen with financial covenants that give creditors the right to intervene in business decisions, often depending on company performance.

“For most industries, there’s a substantial loss to killing a firm,” says Ma. That’s not to say it makes sense to keep all distressed companies alive if they have no hope of turning a profit. But in most cases, there is substantial value to doing so.

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