JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly This paper analyzes the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions. Our main finding is that a firm's debt structure affects the way financially distressed firms restructure. The combination of secured private debt and numerous public debt issues seems to impede out-of-court restructurings and increases the probability of a Chapter 11 filing. In addition, we find that, while asset sales are a way of avoiding Chapter 11, they are limited by industry factors: firms in distressed and highly leveraged industries are less prone to sell assets.VVhen companies are in financial distress, they try to avoid bankruptcy by restructuring their assets and liabilities. Asset sales, mergers, capital expenditure reductions, and layoffs (on the asset side), and restructurings of bank debt and public debt (on the liability side) are all common responses to distress. Absent a quick turnaround in a company's business, a failure to restructure typically results in a Chapter 11 bankruptcy filing.During the past several years there have been a number of studies that analyze these responses to financial distress. Notable contributions include Gilson [1990] on restructurings of bank claims; Gilson, John, and Lang [1990] on debt restructurings versus bankruptcy; Brown, James, and Mooradian [1993] on public debt restructurings versus bank debt restructurings; Brown, James, and Mooradian [1994] on asset sales; and Franks and Torous [1989] and Hotchkiss [1994] on the Chapter 11 process. This paper tries to put these elements together in a more comprehensive study of how firms respond to financial distress. This content downloaded from 91.229.248.162 on Tue, 10 Jun 2014 06:55:05 AM All use subject to JSTOR Terms and Conditions 626 QUARTERLY JOURNAL OF ECONOMICSThis approach also allows us to look at interactions among different kinds of restructurings. Our study is based on a sample of 102 companies that issued high-yield "junk" bonds during the 1970s and 1980s and subsequently got into financial trouble. Of these 102 companies, 76 took visible steps to restructure their companies in response to distress. We have several principal findings. 1. Bank debt restructurings. Banks respond to financial distress in a number of ways. They "loosen" financial constraints on firms by deferring principal and interest, providing new financing, and waiving covenants; they "tighten" financial constraints by accelerating principal and interest payments, reducing lines of credit, and increasin...
This paper presents a framework for analyzing the costs and benefits of internal vs. external capital allocation. We focus primarily on comparing an internal capital market to bank lending. While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter case it is not. We argue that the ownership aspect of internal capital allocation has three important consequences: 1) it leads to more monitoring than bank lending; 2) it reduces managers' entrepreneurial incentives; and 3) it makes it easier to efficiently redeploy the assets of projects that are perfotming poorly under existing management.
We present a model of a financially distressed firm with outstanding bank debt and public debt. Coordination problems among public debtholders introduce investment inefficiencies in the workout process. In most cases, these inefficiencies are not mitigated by the ability of firms to buy back their public debt with cash and other securities‐the only feasible way that firms can restructure their public debt. We show that Chapter 11 reorganization law increases investment, and we characterize the types of corporate financial structures for which this increased investment enhances efficiency.
This paper presents a framework for analyzing the costs and benefits of internal vs. external capital allocation. We focus primarily on comparing an internal capital market to bank lending. While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter case it is not. We argue that the ownership aspect of internal capital allocation has three important consequences: 1) it leads to more monitoring than bank lending; 2) it reduces managers' entrepreneurial incentives; and 3) it makes it easier to efficiently redeploy the assets of projects that are perfotming poorly under existing management.
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