Resolution of Financial Distress: Debt Restructurings via Chapter 11, Prepackaged Bankruptcies, and Workouts

This paper examines empirically a comprehensive sample of firms undertaking Chapter 11 reorganizations, prepackaged bankruptcies, and workouts. We provide evidence that the restructuring decision depends on the degree of the firm's leverage, the severity of its liquidity crisis, the extent of c...

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Bibliographic Details
Published in:Financial management 1996-04, Vol.25 (1), p.5-18
Main Authors: Chatterjee, Sris, Dhillon, Upinder S., Ramírez, Gabriel G.
Format: Article
Language:English
Subjects:
Bank assets
Bankruptcy
Bankruptcy reorganization
Bankruptcy reorganizations
Business enterprises
Chapter 11 bankruptcy
Corporate debt
Debt
Debt contracts
Debt exchanges
Debt restructuring
Debtor and creditor
Finance
Financial leverage
Financial liabilities
Government regulation of business
Hypotheses
Liquidity
Loan workouts
Long term debt
Out of court settlements
Personal bankruptcy
Physical fitness
Public debt
Rates of return
United States
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Summary:This paper examines empirically a comprehensive sample of firms undertaking Chapter 11 reorganizations, prepackaged bankruptcies, and workouts. We provide evidence that the restructuring decision depends on the degree of the firm's leverage, the severity of its liquidity crisis, the extent of creditor's coordination, and the magnitude of its economic distress. The results complement theoretical models of debt restructuring choices. We find that economically distressed firms file for Chapter 11, while economically viable firms prefer workouts. Further, prepackaged bankruptcies are used by firms that are economically viable but face immediate liquidity problems.
ISSN:0046-3892
1755-053X
DOI:10.2307/3665899