Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress

61 Pages Posted: Last revised: 30 Sep 2019

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Ha Nguyen

Indiana University, Kelley School of Business

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies

Wei Wang

Queen's University - Smith School of Business

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: September 30, 2019

Abstract

We construct a comprehensive data set of financially distressed firms that restructured out of court or in bankruptcy from 2000-2014, and study the effect of financial institutions’ simultaneous holdings of debt and equity on the resolution of financial distress. We find that simultaneous holdings are positively associated with the likelihood of out-of-court restructuring versus bankruptcy filing. The effect is stronger when the expected bankruptcy costs are higher. Our results hold after correcting for endogeneity issues. The evidence suggests that simultaneous holdings help mitigate the conflict of interest between debt holders and equity holders and facilitate cost-effective distress resolution.

Keywords: financial distress; bankruptcy; out-of-court restructuring; dual holding; loan; bond; equity

JEL Classification: G20, G30, G33

Suggested Citation

Chu, Yongqiang and Nguyen, Ha and Wang, Jun and Wang, Wei and Wang, Wenyu, Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress (September 30, 2019). Kelley School of Business Research Paper No. 18-66; 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3216923 or http://dx.doi.org/10.2139/ssrn.3216923

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Ha Nguyen

Indiana University, Kelley School of Business ( email )

1309 E 10th street
Bloomington, IN 47405-1701
United States

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies ( email )

Social Science Centre
London, Ontario N6A 5C2
Canada

Wei Wang (Contact Author)

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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