Beware of creditors bearing opportunities?

57 Pages Posted: 10 Nov 2020 Last revised: 24 Feb 2024

See all articles by Nina Baranchuk

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2024

Abstract

Bankruptcy is costly. However, we show that an opportunity to lower this cost is not necessarily good news when the opportunity is facilitated by an expert creditor, like a specialist hedge fund. The reason is a tension between leveraging the creditor's expertise to raise firm value and the creditor's desire to earn rents. To limit the rents, claimants can agree to outcomes that, while they shorten the time spent in bankruptcy, are inefficient and dissipate firm value. Our model show that the value dissipation tends to be greater when bankruptcy is more costly and when bankruptcy is more favorable to creditors.

Keywords: hedge fund, restructuring, bankruptcy, asset sales

JEL Classification: G33

Suggested Citation

Baranchuk, Nina and Rebello, Michael J., Beware of creditors bearing opportunities? (February 14, 2024). Available at SSRN: https://ssrn.com/abstract=3696676 or http://dx.doi.org/10.2139/ssrn.3696676

Nina Baranchuk (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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