Debtor-in-Possession Financing and Bankruptcy Resolution: Empirical Evidence
Posted: 27 Jul 2003
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: Suggested Citation