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Resolving Financial Distress By Way of a Contract:
an Empirical Study of Small UK Companies

60 Pages Posted: 22 Jul 2000  

Julian R. Franks

London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Oren Sussman

University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

Date Written: November 12, 2000

Abstract

This paper provides an empirical study of the resolution of financial distress in England. The study is based upon a unique data set of 532 financially distressed UK companies, most of which are small and privately held. The data were assembled from the private records of three major commercial banks. The main focus of our investigation is a description and analysis of the process of rescue and the extent to which it leads to turnaround or insolvency.

We find that the typical firm in our sample has a capital structure that is dominated by one senior lender (a bank) and dispersed trade creditors. The bank's loan is highly collateralised, it holds all the liquidation rights and controls the rescue process. Notwithstanding, we find an elaborate rescue process that contradicts claims that such a capital structure would lead to virtual automatic liquidation. Also, we find little evidence of co-ordination failures, especially among dispersed trade creditors. The paper provides strong evidence of how a contract driven bankruptcy procedure, with highly collateralised loans, will perform.

Keywords: Bankruptcy

JEL Classification: G24, G31, G32, G33

Suggested Citation

Franks, Julian R. and Sussman, Oren, Resolving Financial Distress By Way of a Contract: an Empirical Study of Small UK Companies (November 12, 2000). AFA 2001 New Orleans Meetings; Presented at Tuck Contemporary Governance Conference. Available at SSRN: https://ssrn.com/abstract=236098 or http://dx.doi.org/10.2139/ssrn.236098

Julian R. Franks (Contact Author)

London Business School ( email )

Institute of Finance and Accounting
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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Oren Sussman

University of Oxford - Said Business School ( email )

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Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Ben-Gurion University of the Negev

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University of London ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

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