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Financial Distress and Restructuring Models

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  • Yehning Chen
  • J. Fred Weston
  • Edward I. Altman
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    Abstract

    This paper provides a synthesis of the theoretical literature on financial distress. It employs a two-state framework, which more clearly captures the generalizations of the more complex models. The equation systems that are derived permit the development of a series of examples that convey the logic and intuitions behind the generalizations. The graphics help illuminate aspects of financial distress not treated in the previous literature. The role of risk is treated explicitly. Alternative assumptions generate different predictions of the effects of financial distress on investment efficiency and restructuring strategy. Central to these strategies are the recontracting arrangements between owners, creditors, and the other relevant stakeholders. The resulting framework permits an evaluation of some central provisions of the prevailing U.S. bankruptcy laws.

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    Bibliographic Info

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

    Volume (Year): 24 (1995)
    Issue (Month): 2 (Summer)
    Pages:

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    Handle: RePEc:fma:fmanag:chen95

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    Cited by:
    1. Hugues Pirotte & Didier Cossin, 1997. "Swap Credit Risk: An Empirical Investigation on Transaction Data," Working Papers CEB 97-001, ULB -- Universite Libre de Bruxelles.
    2. V. M. González-Méndez & Francisco González-Rodríguez, 2000. "Procedimientos de resolución de insolvencia financiera en España: costes de insolvencia y transferencia de riqueza," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 357-384, May.
    3. Gary Cook & Keith Pond, 2006. "Explaining the choice between alternative insolvency regimes for troubled companies in the UK and Sweden," European Journal of Law and Economics, Springer, vol. 22(1), pages 21-47, July.
    4. Chatterjee, Sris & Dhillon, Upinder S. & Ramirez, Gabriel G., 2004. "Debtor-in-possession financing," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3097-3111, December.
    5. Thanida Chitnomrath & Robert Evans & Theo Christopher, 2011. "Corporate governance and post-bankruptcy reorganisation performance: Evidence from Thailand," Asian Review of Accounting, Emerald Group Publishing, vol. 19(1), pages 50-67, May.

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