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Financial Restructuring in Fresh‐Start Chapter 11 Reorganizations

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  • Randall A. Heron
  • Erik Lie
  • Kimberly J. Rodgers

Abstract

We find that firms substantially reduce their debt burden in “fresh‐start” Chapter 11 reorganizations, yet they emerge with higher debt ratios than what is typical in their respective industries. While cross‐sectional regressions reveal that post‐reorganization debt ratios are more in line with the predictions of the static trade‐off theory, they also reveal that pre‐reorganization debt ratios affect post‐reorganization debt ratios. Collectively, these results suggest that impediments in Chapter 11 prevent firms from completely resetting their capital structures. We also find that firms that reported positive operating income leading up to Chapter 11 emerge faster, suggesting that it is quicker to remedy strictly financial distress than economic distress.

Suggested Citation

  • Randall A. Heron & Erik Lie & Kimberly J. Rodgers, 2009. "Financial Restructuring in Fresh‐Start Chapter 11 Reorganizations," Financial Management, Financial Management Association International, vol. 38(4), pages 727-745, December.
    • Handle: RePEc:bla:finmgt:v:38:y:2009:i:4:p:727-745
    DOI: 10.1111/j.1755-053X.2009.01054.x
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    Cited by:

    1. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Resolution of financial distress under Chapter 11," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1867-1887.
    2. Harry DeAngelo & Andrei S. Gonçalves & René M. Stulz, 2016. "Corporate Deleveraging," NBER Working Papers 22828, National Bureau of Economic Research, Inc.
    3. Goodwin, John & Routledge, James, 2021. "Determinants of the duration of the voluntary administration process: An unconditional quantile regression analysis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(3).
    4. Steven Liew Woon Choy & Jayaraman Munusamy & Shankar Chelliah & Ally Mandari, 2011. "Effects of Financial Distress Condition on the Company Performance: A Malaysian Perspective," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 85-99, August.

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