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

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  • Fisher, Timothy C G
  • Martel, Jocelyn

Abstract

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.

Suggested Citation

  • Fisher, Timothy C G & Martel, Jocelyn, 1995. "The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(1), pages 112-126, April.
  • Handle: RePEc:oup:jleorg:v:11:y:1995:i:1:p:112-26
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    References listed on IDEAS

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    1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    2. 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.
    3. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
    4. Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 625-658.
    5. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
    6. 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.
    7. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    8. Bebchuk, Lucian Ayre & Chang, Howard F, 1992. "Bargaining and the Division of Value in Corporate Reorganization," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 253-279, April.
    9. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
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    Citations

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    Cited by:

    1. Stefan Sundgren, 1998. "Does a Reorganization Law Improve the Efficiency of the Insolvency Law? The Finnish Experience," European Journal of Law and Economics, Springer, vol. 6(2), pages 177-198, September.
    2. Bruno Biais & Thomas Mariotti, 2009. "Credit, Wages, and Bankruptcy Laws," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 939-973, September.
    3. repec:kap:ejlwec:v:45:y:2018:i:2:d:10.1007_s10657-017-9560-9 is not listed on IDEAS
    4. Martel, Jocelyn, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78, mars.
    5. Yves Sprumont, 1998. "On the Game-Theoretic Structure of Public-Good Economies," International Journal of Game Theory, Springer;Game Theory Society, vol. 26(4), pages 455-472.
    6. Fisher, Timothy C.G. & Martel, Jocelyn & Gavious, Ilanit, 2016. "Tax claims, government priority, absolute priority and the resolution of financial distress," International Review of Law and Economics, Elsevier, vol. 48(C), pages 50-58.
    7. Jocelyn Martel, 1994. "More on the Impact of Bankruptcy Reform in Canada," CIRANO Working Papers 94s-17, CIRANO.
    8. Bart Leyman, 2012. "The uneasy case for rehabilitating small firms under the 1997-reorganization law in Belgium: evidence from reorganization plans," European Journal of Law and Economics, Springer, vol. 34(3), pages 533-560, December.
    9. T. C.G. Fisher & J. Martel, 2000. "The Bankruptcy Decision : Empirical Evidence from Canada," THEMA Working Papers 2000-47, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    10. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
    11. repec:eur:ejisjr:185 is not listed on IDEAS
    12. Chien-An Wang, 2012. "Determinants of the Choice of Formal Bankruptcy Procedure: An International Comparison of Reorganization and Liquidation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(2), pages 4-28, March.
    13. Ghysels, Eric & Granger, Clive W J & Siklos, Pierre L, 1996. "Is Seasonal Adjustment a Linear or Nonlinear Data-Filtering Process?," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 374-386, July.
    14. Martel, Jocelyn, 1996. "Impact anticipé de la réforme à la loi sur la faillite," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(4), pages 417-432, décembre.
    15. Gilles Recasens, 2003. "Faut-il adopter un système pro-créanciers de défaillances? Une revue de la littérature," Revue Finance Contrôle Stratégie, revues.org, vol. 6(1), pages 119-153, March.
    16. Blazy, Régis & Chopard, Bertrand & Fimayer, Agnès & Guigou, Jean-Daniel, 2011. "Employment preservation vs. creditors' repayment under bankruptcy law: The French dilemma?," International Review of Law and Economics, Elsevier, vol. 31(2), pages 126-141, June.
    17. B. Leyman & K. Schoors & P. Coussement, 2008. "The Role of Firm Viability, Creditor Behavior and Judicial Discretion in the Failure of Distressed Firms under Courtsupervised Restructuring: Evidence from Belgium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/509, Ghent University, Faculty of Economics and Business Administration.
    18. Blazy, Régis & Martel, Jocelyn & Nigam, Nirjhar, 2014. "The choice between informal and formal restructuring: The case of French banks facing distressed SMEs," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 248-263.
    19. Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
    20. Leyman, Bart & Schoors, Koen J.L. & Coussement, Peter, 2011. "Does court-supervised reorganization work? Evidence from post-confirmation firm failure," International Review of Law and Economics, Elsevier, vol. 31(3), pages 149-168, September.
    21. Ondøej Knot & Ondøej Vychodil, 2006. "Czech Bankruptcy Procedures: Ex-post Efficiency View," Working Papers IES 2006/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2006.
    22. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
    23. Chien-An Wang, 2012. "Determinants of the Choice of Formal Bankruptcy Procedure: An International Comparison of Reorganization and Liquidation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(2), pages 4-28, March.
    24. B. Leyman & K. Schoors & P. Coussement, 2008. "Court-supervised Restructuring: Pre-bankruptcy Dynamics, Debt Structure and Debt Rescheduling," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/507, Ghent University, Faculty of Economics and Business Administration.

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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