A Theoretical Framework for Evaluating Debtor-in-Possession Financing
39 Pages Posted: 10 Jun 2014
Date Written: June 9, 2014
The US bankruptcy code provides enhanced priority and security features to debtor-in-possession (DIP) loans which can be obtained from a lender with whom the borrower may have no past lending relationship. The enhanced priority of DIP financing, and the choice of a DIP lender, significantly impact the investment decisions made by the firm. We show DIP loans from an existing lender leads to a higher level of investment. We also show that a higher priority of DIP financing also leads to higher investment by the firm. A bankruptcy judge should take these incentives into account when approving the DIP loan.
Keywords: Debtor-in-Possession Financing, Chapter 11, Bankruptcy
JEL Classification: G33, G28, K22
Suggested Citation: Suggested Citation