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Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

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Author Info
Franks, Julian R
Sussman, Oren
Abstract

We use a unique data set to analyse how UK banks deal with small to medium size distressed firms both inside and outside bankruptcy. The approach to bankruptcy is contract-based, with lenders and borrowers relying on procedures written into the debt contract, and where the courts are largely uninvolved. We find that firms in our sample have highly concentrated debt structures and liquidation rights. As a result, the rescue process is largely free of coordination failures and creditors’ runs. We find that the principal lender, ‘the bank’, makes few concessions to the borrower and that there is a virtual absence of debt forgiveness. Finally, the bank relies heavily on the highly collateralized value of its loan in making the decision to place the distressed firm in bankruptcy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3915.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3915

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Related research
Keywords: bank lending; bankruptcy; collateral; liquidation rights;

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G20 - Financial Economics - - Financial Institutions and Services - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August. [Downloadable!] (restricted)
    Other versions:
  3. Per Strömberg, 2000. "Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests," Journal of Finance, American Finance Association, vol. 55(6), pages 2641-2692, December. [Downloadable!] (restricted)
    Other versions:
  4. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June. [Downloadable!] (restricted)
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  7. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 903-37.
  8. Erik Berglof & Ernst-Ludwig von Thadden, 1994. "Capital Structure with Multiple Investors," CEPR Financial Markets Paper 0044, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG.
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  10. S. Abraham Ravid & Stefan Sundgren, 1998. "The Comparative Efficiency of Small-Firm Bankruptcies: A Study of the US and Finnish Bankruptcy Codes," Financial Management, Financial Management Association, vol. 27(4), Winter.
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  12. Michael C. Jensen, 1989. "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(1), pages 35-44. [Downloadable!] (restricted)
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  15. Berglof, Erik & von Thadden, Ernst-Ludwig, 1994. "Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1055-84, November. [Downloadable!] (restricted)
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  18. S. Abraham Ravid & S. Sundgren, 1998. "The Comparative Efficiency of Small-Firm Bankruptcies: A Study of the US and Finnish Bankruptcy Codes," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-054, New York University, Leonard N. Stern School of Business-.
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  20. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  21. Vicente Cuñat, 2002. "Trade Credit: Suppliers as Debt Collectors and Insurance Providers," Economics Working Papers 625, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2004. [Downloadable!]
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  22. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arroyo, Martín R., 2007. "Information asymmetries, credit rationing and banking concentration: The Argentinean case," MPRA Paper 10760, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Ursel Baumann & Glenn Hoggarth & Darren Pain, . "The substitution of bank for non-bank corporate finance: evidence for the United Kingdom," Bank of England working papers 274, Bank of England. [Downloadable!]
  3. Oren Sussman & Javier Suarez, 2004. "Financial Distress, Bankruptcy Law and the Business Cycle," OFRC Working Papers Series 2004fe07, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
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