Financial distress, bank debt restructurings, and layoffs

Abstract

We develop a model of a financially distressed firm to analyze the implications of a bank debt restructuring when the operational characteristics of the firm's project for the post-distress period are endogenously determined as part of the workout. We establish a formal link between the debt restructuring and operational actions such as employee layoffs, and show how these actions are affected by the firm's capital structure, the ordering of absolute priorities, and the allocation of control rights and residual claims after reorganization. Finally, we discuss the implications of our analysis for the design of reorganization law.JEL classification: G32, G33, J21

Legal form and risk exposure in Spanish firms

“…This subsection presents a simple labor market model that, within a standard partial equilibrium framework, serves to illustrate the idea that different liability regimes imply different real behavior among firms. The model, based on a representative firm with risk neutral owners, builds on Padilla and Requejo (2000). After choosing its legal form between a limited or unlimited liability status, our analysis starts by considering that the firm has access to a production technology which requires an investment of I > 0 to buy a certain level of capital stock for the period.…”

Corporate Financial Distress – Corporate Debt Restructuring Mechanism in India

“…They found that these recoveries are not only due to the economic downturn but also financial constraints due to fire-sale. (Padilla & Requejo, 2000) Shows that debt restructuring process will trigger operational actions to make the firm more "focused'. It enables creditors to impose their views on the firm's future prospects and the result of a shift of control right and residual claims from shareholders to creditors which are value increasing and reduce the future distress.…”