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Resolution of financial distress: A theory of the choice between Chapter 11 and workouts

  • John, Kose
  • Mateti, Ravi S.
  • Vasudevan, Gopala

We model the reorganization decision of distressed firms. One of the novel features of our paper is that we examine the asset and liability side restructuring decisions jointly to resolve financial distress. Secondly, we model several institutional features of coping with financial distress such as debtor-in-possession financing, prepackaged bankruptcies, and asset sales. In our model, asset liquidity, indirect costs of financial distress, and the option value of equity are the determinants of the choice between Chapter 11 reorganizations and workouts. The model develops several testable predictions, some of which are novel and others of which are able to explain previously documented empirical results.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 9 (2013)
Issue (Month): 2 ()
Pages: 196-209

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Handle: RePEc:eee:finsta:v:9:y:2013:i:2:p:196-209
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  18. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  19. Sris Chatterjee & Upinder S. Dhillon & Gabriel G. Ramirez, 1996. "Resolution of Financial Distress : Debt Restructurings via Chapter 11, Prepackaged Bankruptcies, and Workouts," Financial Management, Financial Management Association, vol. 25(1), Spring.
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