Who Pulls the Plug? Theory and Evidence on Corporate Bankruptcy Decisions

Abstract:     
We offer a model and evidence on firms' optimal bankruptcy decisions. In the model, both the borrower and bank lenders can trigger a bankruptcy filing. We show that debt composition has significant influence on corporate bankruptcy decisions. For example, firms with a small share of bank debt as a fraction of total debt tend to voluntarily file for bankruptcy. When a firm depends heavily on bank debt, the bankruptcy boundary is more likely to be determined by the bank. Our results highlight the control rights of large private creditors in distressed firms.

Keywords: Voluntary bankruptcy, Forced bankruptcy, Bankruptcy boundary, Debt structure, Creditor control

JEL Classifications: G33, G32, G21

Working Paper Series