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Economic Distress, Financial Distress, and Dynamic Liquidation

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  • Matthias Kahl

Abstract

Many firms emerging from a debt restructuring remain highly leveraged, continue to invest little, perform poorly, and often reenter financial distress. The existing literature interprets these findings as inefficiencies arising from coordination problems among many creditors or an inefficient design of bankruptcy law. In contrast, this paper emphasizes that creditors lack the information that is needed to make quick and correct liquidation decisions. It can explain the long‐term nature of financial distress solely as the result of dynamic learning strategies of creditors and suggests that it may be an unavoidable byproduct of an efficient resolution of financial distress.

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  • Matthias Kahl, 2002. "Economic Distress, Financial Distress, and Dynamic Liquidation," Journal of Finance, American Finance Association, vol. 57(1), pages 135-168, February.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:1:p:135-168
    DOI: 10.1111/1540-6261.00418
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    References listed on IDEAS

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