A Theory of Workouts and the Effects of Reorganization Law
Robert H. Gertner
University of Chicago - Finance; National Bureau of Economic Research (NBER)
David S. Scharfstein
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
NBER Working Paper No. t0103
We present a model of a financially distressed firm with outstanding bank debt and public debt. Coordination problems among public debtholders introduce investment inefficiencies in the workout process. In most cases, these inefficiencies are not mitigated by the ability of firms to buy back their public debt with cash and other securities--the only feasible way that firms can restructure their public debt. We show that Chapter 11 reorganization law increases investment and we characterize the types of corporate financial structures for which this increased investment enhances efficiency.
Number of Pages in PDF File: 42working papers series
Date posted: December 28, 2006
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