A Theoretical Framework for Evaluating Debtor-in-Possession Financing

39 Pages Posted: 10 Jun 2014

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

Korok Ray

Texas A&M University - Mays Innovation Research Center

Date Written: June 9, 2014

Abstract

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

Dahiya, Sandeep and Ray, Korok, A Theoretical Framework for Evaluating Debtor-in-Possession Financing (June 9, 2014). Available at SSRN: https://ssrn.com/abstract=2447868 or http://dx.doi.org/10.2139/ssrn.2447868

Sandeep Dahiya (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Korok Ray

Texas A&M University - Mays Innovation Research Center ( email )

4113 TAMU College State
TX 77843-4113
United States

HOME PAGE: http://mays.tamu.edu/directory/korok/

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