Debtor-in-possession financing and bankruptcy resolution: Empirical evidence

Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorgani...

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Bibliographic Details
Published in:Journal of financial economics 2003-07, Vol.69 (1), p.259-280
Main Authors: Dahiya, Sandeep, John, Kose, Puri, Manju, Ramı́rez, Gabriel
Format: Article
Language:English
Subjects:
Bankruptcy
Bankruptcy reorganization
Chapter 11
Corporate governance
Debtor-in-possession financing
Debtors
Economics
Finance
Financial economics
Financial management
Financing
Investment
Organizational structure
Structural adjustment
Studies
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Summary:Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorganization and reduce time in bankruptcy. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from Chapter 11 than non-DIP financed firms. DIP financed firms have a shorter reorganization period; they are quicker to emerge and also quicker to liquidate. The reorganization period is even shorter when prior lenders provide the DIP financing.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(03)00113-2