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Signaling in Financial Reorganization: Theory and Evidence from Canada

  • Jocelyn Martel

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.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-34.

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Length: 39 pages
Date of creation: 01 Jan 1995
Date of revision:
Handle: RePEc:cir:cirwor:95s-34
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  1. 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 253-79, April.
  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. Timothy C. G. Fisher & Jocelyn Martel, 1994. "The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data," CIRANO Working Papers 94s-21, CIRANO.
  4. Aghion, P. & Hart, O. & Moore, J., 1992. "The Economics of Bankruptcy Reform," Working papers 92-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. 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.
  6. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
  7. 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.
  8. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
  9. Gunderson, Morley & Kervin, John & Reid, Frank, 1986. "Logit Estimates of Strike Incidence from Canadian Contract Data," Journal of Labor Economics, University of Chicago Press, vol. 4(2), pages 257-76, April.
  10. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Jocelyn Martel, 1991. "Bankruptcy Law and the Canadian Experience: An Economic Appraisal," Canadian Public Policy, University of Toronto Press, vol. 17(1), pages 52-63, March.
  13. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  14. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  15. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  16. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
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