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The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data

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  • Fisher, T.C.G.
  • Martel, J.

Abstract

This article examines a data set of 338 randomly selected financial reorganization plans filed in Canada during the period 1978-87. Creditors reject roughly 25 percent of reorganization plans, while about 20 percent of the plans creditors accept fail before completion, providing evidence of filtering failure in the reorganization process. A logic model of the creditors' reorganization decision produces two interesting results: (1) plans offering a high proportion of cash payments are more likely to be accepted by creditors, which we interpret as evidence that cash is a signal of financial viability; (2) plans with high ratios of secured debt are more likely to be accepted, which we interpret as evidence that secured creditors with insider knowledge signal information about the financial viability of firms to unsecured creditors. Copyright 1995 by Oxford University Press.

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File URL: http://hdl.handle.net/1866/2095
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9417.

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Length: ; 19 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:mtl:montde:9417

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Keywords: BANKRUPTCY ; FINANCIAL INSTITUTIONS;

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References

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  1. 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.
  2. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  3. 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.
  4. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  7. Lucian Arye Bebchuk & Howard F. Chang, 1991. "Bargaining and the Division of Value in Corporate Reorganization," NBER Technical Working Papers 0097, National Bureau of Economic Research, Inc.
  8. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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Citations

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Cited by:
  1. T. C.G. Fisher & J. Martel, 2000. "The Bankruptcy Decision : Empirical Evidence from Canada," THEMA Working Papers 2000-47, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Ghysels, Eric & Granger, Clive W J & Siklos, Pierre L, 1996. "Is Seasonal Adjustment a Linear or Nonlinear Data-Filtering Process?," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 374-86, July.
  3. Bruno Biais & Thomas Mariotti, 2009. "Credit, Wages, and Bankruptcy Laws," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 939-973, 09.
  4. Sprumont, Y., 1995. "On the Game-Theoretic Structure of Public-Good Economies," Cahiers de recherche 9519, Universite de Montreal, Departement de sciences economiques.
  5. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  6. Erkki Laitinen, 2011. "Assessing viability of Finnish reorganization and bankruptcy firms," European Journal of Law and Economics, Springer, vol. 31(2), pages 167-198, April.
  7. Stefan Sundgren, 1998. "Does a Reorganization Law Improve the Efficiency of the Insolvency Law? The Finnish Experience," European Journal of Law and Economics, Springer, vol. 6(2), pages 177-198, September.
  8. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
  9. Ondøej Knot & Ondøej Vychodil, 2006. "Czech Bankruptcy Procedures: Ex-post Efficiency View," Working Papers IES 2006/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2006.
  10. Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
  11. Martel, Jocelyn, 1996. "Impact anticipé de la réforme à la loi sur la faillite," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(4), pages 417-432, décembre.
  12. B. Leyman & K. Schoors & P. Coussement, 2008. "Court-supervised Restructuring: Pre-bankruptcy Dynamics, Debt Structure and Debt Rescheduling," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/507, Ghent University, Faculty of Economics and Business Administration.
  13. Jocelyn Martel, 1994. "More on the Impact of Bankruptcy Reform in Canada," CIRANO Working Papers 94s-17, CIRANO.
  14. B. Leyman & K. Schoors & P. Coussement, 2008. "The Role of Firm Viability, Creditor Behavior and Judicial Discretion in the Failure of Distressed Firms under Courtsupervised Restructuring: Evidence from Belgium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/509, Ghent University, Faculty of Economics and Business Administration.
  15. Martel, Jocelyn, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78, mars.
  16. Bart Leyman, 2012. "The uneasy case for rehabilitating small firms under the 1997-reorganization law in Belgium: evidence from reorganization plans," European Journal of Law and Economics, Springer, vol. 34(3), pages 533-560, December.

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