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An Empirical Examination of Prepackaged Bankruptcy

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  • Brian L. Betker
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    Abstract

    Analysis of 49 prepackaged bankruptcies allows identification of the economic gains from this form of restructuring. Results show that the direct costs of prepacks are comparable to those previously reported for "traditional" bankruptcies. Firms routinely pay the pre-bankruptcy expenses of creditor groups, so most direct expenses are incurred prior to filing. The gains from prepack stem from binding holdouts to a negotiated agreement and from the tax effects of future use of net operating loss carry-forwards. Significant tax savings can result from completing a prepack instead of an exchange offer, indicating the importance of tax considerations in firms' restructuring decisions.

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    Bibliographic Info

    Article provided by Financial Management Association in its journal Financial Management.

    Volume (Year): 24 (1995)
    Issue (Month): 1 (Spring)
    Pages:

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    Handle: RePEc:fma:fmanag:betker95

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    Cited by:
    1. Michael J. Alderson & Brian L. Betker, . "Liquidation Versus Continuation: Did Reorganized Firms Do The Right Thing?," Research in Financial Economics 9512, Ohio State University.
    2. Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
    3. Galai, Dan & Raviv, Alon & Wiener, Zvi, 2007. "Liquidation triggers and the valuation of equity and debt," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3604-3620, December.
    4. Ian A. Cooper & Kjell G. Nyborg, 2008. "Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt," Financial Management, Financial Management Association International, vol. 37(2), pages 365-379, 06.
    5. Hotchkiss, Edith S. & Mooradian, Robert M., 1997. "Vulture investors and the market for control of distressed firms," Journal of Financial Economics, Elsevier, vol. 43(3), pages 401-432, March.
    6. Orbe Lizundia, Jesús María & Núñez Antón, Vicente Alfredo & Ferreira García, María Eva, 2001. "Analysis of Length of Time Spent in Chapter 11 Bankruptcy," BILTOKI 2001-01, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    7. M. Martin Boyer, 2001. "Project Financing when the Principal Cannot Commit," CIRANO Working Papers 2001s-29, CIRANO.
    8. Persons, John C., 1997. "Liars Never Prosper? How Management Misrepresentation Reduces Monitoring Costs," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 269-306, October.
    9. Oscar Couwenberg & Abe Jong, 2008. "Costs and recovery rates in the Dutch liquidation-based bankruptcy system," European Journal of Law and Economics, Springer, vol. 26(2), pages 105-127, October.
    10. Espen Eckbo, B. & Thorburn, S. Karin, 2008. "Automatic bankruptcy auctions and fire-sales," Journal of Financial Economics, Elsevier, vol. 89(3), pages 404-422, September.
    11. Marianna Succurro, 2012. "Bankruptcy systems and economic performance across countries: some empirical evidence," European Journal of Law and Economics, Springer, vol. 33(1), pages 101-126, February.
    12. Marianna Succurro, 2008. "Bankruptcy Systems And Economic Performance Across Contries: Some Empirical Evidence," Working Papers 200801, Università della Calabria, Dipartimento di Economia, Statistica e Finanza (Ex Dipartimento di Economia e Statistica).
    13. Eckbo, B. Espen & Thorburn, Karin S., 2009. "Creditor financing and overbidding in bankruptcy auctions: Theory and tests," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 10-29, February.
    14. Li, Yuanzhi & Zhong, Zhaodong (Ken), 2013. "Investing in Chapter 11 stocks: Trading, value, and performance," Journal of Financial Markets, Elsevier, vol. 16(1), pages 33-60.
    15. Abel Elizalde, 2006. "Credit Risk Models Ii: Structural Models," Working Papers wp2006_0606, CEMFI.

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