Restructuring vs. Bankruptcy
67 Pages Posted: 13 Oct 2020
Date Written: September 23, 2020
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: Suggested Citation