This dissertation addresses the question as to whether financial markets and the legal environment provide an effective selection mechanism for the continuation or liquidation of financially distressed firms. Effective selection in this context entails the reorganization of viable and the immediate liquidation of non-viable firms. The dissertation analyses issues that may potentially prevent the effective continuation of a firm. Secondly, it examines the extent to which bankruptcy legislation can enhance the effectiveness of the decision to continue, i.e. the contribution legal standards, versus a balancing of interests through market mechanisms, make to overall economic welfare. The author bases her analysis on a comparison of the German and the US American legal framework and illustrates clearly the differences between the two legal systems.