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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

The paper examines a data set of 338 randomly selected financial reorganization plans filed in Canada during the period 1978-87. Creditors reject roughly 25% of reorganization plans, while about 20% of the plans creditors accept fail before completion, providing evidence of filtering failure in the reorganization process. A logit model of the creditors' reorganization decision produces two interesting results. 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. 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. Ce document a pour but d'étudier le processus de réorganisation financière au Canada sur la base d'un échantillon de 338 propositions de réorganisations commerciales au cours de la période 1978-1987. Les données démontrent que 25 % des propositions sont rejetées par les créanciers non-garantis et qu'environ 20 % des propositions acceptées résultent éventuellement en un échec. Une analyse du comportement des créanciers lors du vote sur une proposition génère deux résultats intéressants. Premièrement, la probabilité d'acceptation d'une proposition augmente avec la proportion des paiements comptants fait aux créanciers. L'utilisation de paiements comptants est interprêtée comme un signal quand à la viabilité d'une firme. Deuxièmement, la probabilité d'acceptation d'une proposition augmente avec la proportion des créances garanties à l'intérieur de la firme. Ce résultat supporte la thèse à l'effet que les banques possèdent de l'information privilégiée sur la viabilité des entreprises et fournit une nouvelle évidence quant au rôle des banques dans la transmission de cette information vers les créanciers non-garantis.

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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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Postal: CP 6128, Succ. Centre-Ville, Montréal, Québec, H3C 3J7
Phone: (514) 343-6540
Fax: (514) 343-5831
Web page: http://www.sceco.umontreal.ca
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Keywords: BANKRUPTCY ; FINANCIAL INSTITUTIONS;

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References

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  1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  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. Paul Asquith & Robert Gertner & David Scharfstein, 1991. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," NBER Working Papers 3942, National Bureau of Economic Research, Inc.
  4. 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.
  5. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  6. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  7. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
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Citations

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Cited by:
  1. Sprumont, Y., 1995. "On the Game-Theoretic Structure of Public-Good Economies," Cahiers de recherche 9519, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Biais, Bruno & Mariotti, Thomas, 2008. "Credit, Wages and Bankruptcy Laws," IDEI Working Papers 289, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Ghysels, E. & Granger, C.W.J. & Siklos, P.L., 1995. "Is Seasonal Adjustment a Linear or Nonlinear Data Filtring Process," Cahiers de recherche 9517, Universite de Montreal, Departement de sciences economiques.
  4. Martel, Jocelyn, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78, mars.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
  10. Jocelyn Martel, 1994. "More on the Impact of Bankruptcy Reform in Canada," CIRANO Working Papers 94s-17, CIRANO.
  11. 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.
  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, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
  14. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  15. 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.
  16. 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.

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