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Resolution of financial distress: A theory of the choice between Chapter 11 and workouts

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  • John, Kose
  • Mateti, Ravi S.
  • Vasudevan, Gopala

Abstract

We model the reorganization decision of distressed firms. One of the novel features of our paper is that we examine the asset and liability side restructuring decisions jointly to resolve financial distress. Secondly, we model several institutional features of coping with financial distress such as debtor-in-possession financing, prepackaged bankruptcies, and asset sales. In our model, asset liquidity, indirect costs of financial distress, and the option value of equity are the determinants of the choice between Chapter 11 reorganizations and workouts. The model develops several testable predictions, some of which are novel and others of which are able to explain previously documented empirical results.

Suggested Citation

  • John, Kose & Mateti, Ravi S. & Vasudevan, Gopala, 2013. "Resolution of financial distress: A theory of the choice between Chapter 11 and workouts," Journal of Financial Stability, Elsevier, vol. 9(2), pages 196-209.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:2:p:196-209
    DOI: 10.1016/j.jfs.2013.03.004
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    Cited by:

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    2. Bennett, Rosalind L. & Unal, Haluk, 2014. "The effects of resolution methods and industry stress on the loss on assets from bank failures," Journal of Financial Stability, Elsevier, vol. 15(C), pages 18-31.
    3. Beiqi Lin & Chelsea Liu & Kelvin Jui Keng Tan & Qing Zhou, 2020. "CEO turnover and bankrupt firms’ emergence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1238-1267, October.

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    More about this item

    Keywords

    Chapter 11; Workouts; Prepackaged filings; Debtor-in-possession financing;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G3 - Financial Economics - - Corporate Finance and Governance

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