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

  • Fisher, T.C.G.
  • Martel, J.

The paper examines a data set of 338 randomly selected financial reorganization plans filed in Canada during the period 1978-87. Creditors reject roughly 25% of reorganization plans, while about 20% of the plans creditors accept fail before completion, providing evidence of filtering failure in the reorganization process. A logit model of the creditors' reorganization decision produces two interesting results. 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. 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. Ce document a pour but d'étudier le processus de réorganisation financière au Canada sur la base d'un échantillon de 338 propositions de réorganisations commerciales au cours de la période 1978-1987. Les données démontrent que 25 % des propositions sont rejetées par les créanciers non-garantis et qu'environ 20 % des propositions acceptées résultent éventuellement en un échec. Une analyse du comportement des créanciers lors du vote sur une proposition génère deux résultats intéressants. Premièrement, la probabilité d'acceptation d'une proposition augmente avec la proportion des paiements comptants fait aux créanciers. L'utilisation de paiements comptants est interprêtée comme un signal quand à la viabilité d'une firme. Deuxièmement, la probabilité d'acceptation d'une proposition augmente avec la proportion des créances garanties à l'intérieur de la firme. Ce résultat supporte la thèse à l'effet que les banques possèdent de l'information privilégiée sur la viabilité des entreprises et fournit une nouvelle évidence quant au rôle des banques dans la transmission de cette information vers les créanciers non-garantis.

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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 9417.

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Length: ; 19 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:mtl:montde:9417
Contact details of provider: Postal: CP 6128, Succ. Centre-Ville, Montréal, Québec, H3C 3J7
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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. 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.
  3. 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.
  4. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  5. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  6. 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.
  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. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  9. 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.
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