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The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data

  • Fisher, Timothy C G
  • Martel, Jocelyn

This article examines a data set of 338 randomly selected financial reorganization plans filed in Canada during the period 1978-87. Creditors reject roughly 25 percent of reorganization plans, while about 20 percent of the plans creditors accept fail before completion, providing evidence of filtering failure in the reorganization process. A logic model of the creditors' reorganization decision produces two interesting results: (1) 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; (2) 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. Copyright 1995 by Oxford University Press.

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Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 11 (1995)
Issue (Month): 1 (April)
Pages: 112-26

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Handle: RePEc:oup:jleorg:v:11:y:1995:i:1:p:112-26
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  1. 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.
  2. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  3. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  4. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August.
  5. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  6. 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.
  7. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  8. 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.
  9. 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.
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