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Signaling in Financial Reorganization: Theory and Evidence from Canada

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  • Jocelyn Martel

Abstract

This article proposes a signaling model of financial reorganization in which the firms use the provisions of the reorganization proposal, in particular the split between short term cash and deferred payments, to signal their viability to uninformed unsecured creditors. The empirical analysis based on an original data set of 393 Canadian firms in reorganization confirms that the probability of success in reorganization increases with the proportion of short term cash payments (3 to 6 months) to unsecured creditors, when controlling for the fact that firms are cash constrained. Also, the probability of acceptance of a proposal by unsecured creditors increases with the proportion of up-front payments (1 month) and the perceived probability of success of the proposal by unsecured creditors. Cet article propose un modèle de comportement de la firme en réorganisation financière dans lequel la structure du contrat de réorganisation, et plus particulièrement la répartition entre les paiements comptants et différés, est utilisée afin de transmettre de l'information aux créanciers non-informés sur la viabilité de la firme. Les prédictions du modèle sont testées à l'aide d'une banque de données originale de 393 entreprises canadiennes en réorganisation financière. L'analyse empirique confirme que la probabilité de succès en réorganisation augmente avec la proportion des paiements à court terme (3 à 6 mois) aux créanciers non-garantis, après avoir contrôlé pour la contrainte de liquidité des entreprises. De plus, la probabilité d'acceptation d'une proposition par les créanciers non-garantis augmente avec la proportion des paiements comptants (1 mois) et la probabilité de succès de la proposition telle qu'anticipée par les créanciers.

Suggested Citation

  • Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
    • Handle: RePEc:cir:cirwor:95s-34
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    File URL: https://cirano.qc.ca/files/publications/95s-34.pdf
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    Cited by:

    1. Jocelyn Martel, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78.
    2. Fisher, Timothy C G & Martel, Jocelyn, 1999. "Should We Abolish Chapter 11? Evidence from Canada," The Journal of Legal Studies, University of Chicago Press, vol. 28(1), pages 233-257, January.
    3. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.

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    JEL classification:

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

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