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Financial distress, bank debt restructurings, and layoffs

Author

Listed:
  • A. Jorge Padilla

    () (CEMFI and CEPR, c/ Casado del Alisal, 5, 28014 Madrid, Spain Universidad Carlos III de Madrid, Departamento de Economía de la Empresa, c/ Madrid 126, 28903 Getafe , Spain NERA, Antonio Maura, 7, 28014 Madrid, Spain)

  • Alejandro Requejo

    () (CEMFI and CEPR, c/ Casado del Alisal, 5, 28014 Madrid, Spain Universidad Carlos III de Madrid, Departamento de Economía de la Empresa, c/ Madrid 126, 28903 Getafe , Spain NERA, Antonio Maura, 7, 28014 Madrid, Spain)

Abstract

We develop a model of a financially distressed firm to analyze the implications of a bank debt restructuring when the operational characteristics of the firm's project for the post-distress period are endogenously determined as part of the workout. We establish a formal link between the debt restructuring and operational actions such as employee layoffs, and show how these actions are affected by the firm's capital structure, the ordering of absolute priorities, and the allocation of control rights and residual claims after reorganization. Finally, we discuss the implications of our analysis for the design of reorganization law.

Suggested Citation

  • A. Jorge Padilla & Alejandro Requejo, 2000. "Financial distress, bank debt restructurings, and layoffs," Spanish Economic Review, Springer;Spanish Economic Association, vol. 2(2), pages 73-103.
  • Handle: RePEc:spr:specre:v:2:y:2000:i:2:p:73-103
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    More about this item

    Keywords

    Bank debt; financial distress; layoffs; limited liability; reorganization law;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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