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Creditor Conflict and the Efficiency of Corporate Reorganization

47 Pages Posted: 4 Jun 2014  

Mark Jenkins

University of Pennsylvania - Finance Department

David C. Smith

University of Virginia - McIntire School of Commerce

Multiple version iconThere are 2 versions of this paper

Date Written: May 29, 2014

Abstract

We develop a bargaining model that assumes a senior creditor can exert strong control over whether a firm reorganizes as a going-concern or liquidates during the bankruptcy process. The estimable parameters of the model allow us to gauge the efficiency of bankruptcy outcomes using a large sample of U.S. corporate bankruptcy cases over the period 1989 to 2011. The main result of the paper is an estimate of the value loss that results from inefficient liquidations in bankruptcy. We estimate these losses to be up to 0.28 percent of the going-concern value of the firm, on average, across all bankrupt firms in our sample. As predicted by theory, these losses primarily are realized by firms with asset values that are close to the face value of secured debt. Our estimate of efficiency losses is driven by several auxiliary findings, including estimates of the fraction of firms that are efficiently reorganized, the fraction of firms that are efficiently and inefficiently liquidated, and the average liquidation discount faced by firms in bankruptcy.

Keywords: capital structure, incentive conflicts, bankruptcy reorganization, inefficient liquidation

JEL Classification: G32, G33

Suggested Citation

Jenkins, Mark and Smith, David C., Creditor Conflict and the Efficiency of Corporate Reorganization (May 29, 2014). Available at SSRN: https://ssrn.com/abstract=2444700 or http://dx.doi.org/10.2139/ssrn.2444700

Mark Jenkins

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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