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Workouts, court-supervised reorganization and the choice between private and public debt

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  • Hege, Ulrich

Abstract

This paper investigates the interaction between creditor structure and reorganization law. Private debt offers the advantage of flexible renegotiation out of court. Due to incomplete information and holdout incentives, the out-of-court renegotiation will typically fail for dispersed public debt. The introduction of Chapter 11-style renegotiation will benefit public debt firms and will be harmful for private debt firms. Moreover, Chapter 11 reduces the role of private debt in corporate borrowing in accordance with the US experience. The overall efficiency of a reorganization law is therefore ambiguous. Three prominent shortcomings of Chapter 11--its cost and delay, equity deviations and inefficient continuation--are shown to do little harm or even shown to be welfare-improving as they increase the incentives to renegotiate debt out of court and choose private debt. The effect of a low-cost reorganization procedure is more likely to be positive in a market-based financial system.
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  • Hege, Ulrich, 2003. "Workouts, court-supervised reorganization and the choice between private and public debt," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 233-269, March.
  • Handle: RePEc:eee:corfin:v:9:y:2003:i:2:p:233-269
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    Cited by:

    1. Cadigan, John & Schmitt, Pamela & Shupp, Robert & Swope, Kurtis, 2011. "The holdout problem and urban sprawl: Experimental evidence," Journal of Urban Economics, Elsevier, vol. 69(1), pages 72-81, January.
    2. Ulrich Hege & Pierre Mella-Barral, 2005. "Repeated Dilution of Diffusely Held Debt," The Journal of Business, University of Chicago Press, vol. 78(3), pages 737-786, May.
    3. John Cadigan & Pamela Schmitt & Robert Shupp & Kurtis Swope1, 2009. "An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 344-457, October.
    4. Hege, U. & Mella-Barral, P., 1999. "Collateral, Renegotiation and the Value of Diffusely Held Debt," Discussion Paper 1999-94, Tilburg University, Center for Economic Research.
    5. repec:eur:ejisjr:185 is not listed on IDEAS
    6. Dewaelheyns, Nico & Van Hulle, Cynthia, 2009. "Filtering speed in a Continental European reorganization procedure," International Review of Law and Economics, Elsevier, vol. 29(4), pages 375-387, December.
    7. Andras Danis, 2013. "Do Empty Creditors Matter? Evidence from Distressed Exchange Offers," IEHAS Discussion Papers 1334, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    8. Hind Sami, 2005. "Financial Distress and Reputational Concerns," Working Papers 0509, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    9. Nico Dewaelheyns & Cynthia Hulle, 2008. "Legal reform and aggregate small and micro business bankruptcy rates: evidence from the 1997 Belgian bankruptcy code," Small Business Economics, Springer, vol. 31(4), pages 409-424, December.

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