Debtor-in-Possession Financing and Bankruptcy Resolution: Empirical Evidence

Posted: 27 Jul 2003

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

Kose John

New York University (NYU) - Department of Finance

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Abstract

Debtor-in-Possession (DIP) financing is a unique form of enhanced secured financing that is granted to firms filing for reorganization under Chapter 11 of the US Bankruptcy Code. Opponents of DIP financing argue that such financing can lead to overinvestment, i.e., excessive investment in risky, (even negative NPV) projects. Alternatively, DIP financing can allow funding for positive NPV projects. Related to this is the question of whether DIP financing is related to a quicker resolution of the bankruptcy process. We examine these issues empirically. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from the Chapter 11 process than non-DIP financed firms. Interestingly, DIP financed firms have a shorter reorganization period; they are quicker to emerge and also quicker to liquidate. The time spent in bankruptcy is even shorter when the DIP lender also has a prior lending relationship with the firm.

Keywords: Collateral, Yields, Credit Rating

JEL Classification: G2, G3

Suggested Citation

Dahiya, Sandeep and John, Kose and Puri, Manju and Ramirez, Gabriel G., Debtor-in-Possession Financing and Bankruptcy Resolution: Empirical Evidence. Journal of Financial Economics, Vol. 69, No. 1, July 2003. Available at SSRN: https://ssrn.com/abstract=316719

Sandeep Dahiya (Contact Author)

Georgetown University - Department of Finance ( email )

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

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)

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