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An Empirical Investigation of U.S. Firms in Reorganization
Author(s) -
FRANKS JULIAN R.,
TOROUS WALTER N.
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb04389.x
Subject(s) - shareholder , empirical examination , creditor , debt , value (mathematics) , empirical research , process (computing) , business , economics , empirical evidence , accounting , microeconomics , financial economics , actuarial science , finance , computer science , corporate governance , philosophy , epistemology , machine learning , operating system
The purpose of this paper is to understand the institutional features of Chapter 11 from an empirical examination of thirty firms that have emerged from reorganization. We find the recontracting framework of Chapter 11 to be complex, lengthy, and costly. Violations of absolute priority in favor of stockholders are frequently encountered. These deviations may result from the bargaining process of Chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder‐oriented management to preserve firm value. An example of such recontracting addresses Myers' underinvestment problem. An investigation of the effects of Chapter 11 on the pricing of risky debt is also provided.