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The Resolution of Financial Distress

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  • Giammarino, Ronald M
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    Abstract

    Most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm. This approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization. In this article we show that despite the possibility of costless reorganization, it may be rational for firms to incur significant costs in the resolution of financial distress. The main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 2 (1989)
    Issue (Month): 1 ()
    Pages: 25-47
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    Handle: RePEc:oup:rfinst:v:2:y:1989:i:1:p:25-47

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    Citations

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    Cited by:
    1. Lucian Arye Bebchuk, 2002. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," Journal of Finance, American Finance Association, vol. 57(1), pages 445-460, 02.
    2. Timothy C. G. Fisher & Jocelyn Martel, 1994. "The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data," CIRANO Working Papers 94s-21, CIRANO.
    3. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
    4. Ying Yan, 1997. "Credit rationing, bankruptcy cost, and the optimal debt contract for small business," Working Paper 9702, Federal Reserve Bank of Cleveland.
    5. Martel, Jocelyn, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78, mars.
    6. Anton Miglo, 2006. "Debt-equity choice as a signal of earnings profile over time," Working Papers 0607, University of Guelph, Department of Economics.
    7. Dong-Kyoon Kim & Chuck Kwok, 2009. "The influence of managerial incentives on the resolution of financial distress," Review of Quantitative Finance and Accounting, Springer, vol. 32(1), pages 61-83, January.
    8. Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
    9. Ying Yan, 1996. "Credit Rationing, Bankruptcy Cost, and Optimal Debt Contract for Small Business," Finance 9612003, EconWPA.
    10. Giacinto Micucci & Paola Rossi, 2010. "Debt restructuring and the role of lending technologies," Temi di discussione (Economic working papers) 763, Bank of Italy, Economic Research and International Relations Area.
    11. Gordon M Phillips & Vojislav Maksimovic, 1996. "Efficiency of Bankrupt Firms and Industry Conditions: Theory and Evidence," Working Papers 96-12, Center for Economic Studies, U.S. Census Bureau.
    12. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October.
    13. Hind Sami, 2005. "Financial Distress and Reputational Concerns," Working Papers 0509, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    14. Miglo, Anton, 2006. "Debt-equity choice as a signal of profit profile over time," MPRA Paper 1283, University Library of Munich, Germany.

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