Restructuring vs. Bankruptcy

67 Pages Posted: 13 Oct 2020

See all articles by Jason Roderick Donaldson

Jason Roderick Donaldson

Washington University in St. Louis

Edward R. Morrison

Columbia Law School

Giorgia Piacentino

Columbia University

Xiaobo Yu

Columbia University - Columbia Business School

Date Written: September 23, 2020

Abstract

We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of the absolute priority rule).

Keywords: Restructuring, bankruptcy, collective action problem, holdout creditors, relief policy

JEL Classification: G30, G33, G38, K20, K22

Suggested Citation

Donaldson, Jason Roderick and Morrison, Edward R. and Piacentino, Giorgia and Yu, Xiaobo, Restructuring vs. Bankruptcy (September 23, 2020). Columbia Law and Economics Working Paper No. 630, Available at SSRN: https://ssrn.com/abstract=3698161 or http://dx.doi.org/10.2139/ssrn.3698161

Jason Roderick Donaldson

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Edward R. Morrison

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Giorgia Piacentino (Contact Author)

Columbia University ( email )

New York

Xiaobo Yu

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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