Creditor Voting and Time Constraints in Bankruptcy Reorganizations

Abstract

We analyze how creditors behave in corporate renegotiations, constructing a novel database containing 11,388 claim-level votes across 200 bankruptcy reorganization filings in Brazil. We document several regularities in the data and analyze the role played by an important constraint: the time available for negotiations, which we proxy by the duration of the court process. Using random assignment of bankruptcy cases across judges with heterogeneous tendencies to delay, we find that each additional month of court delay increases the probability of approval votes from banks and accounts receivable owners by 0.05, or 6.3% relative to the average. This increases the probability of plan approval. Consistent with the notion of time constraints reducing the ability to reach many creditors, we show that these effects are driven by companies with high debt dispersion. Our results suggest that reforms expediting bankruptcy cases could undesirably increase the number of liquidations.

Keywords: Distressed debt, Chapter 11, Corporate bankruptcy, Corporate reorganization

JEL Classification: G32, G33, G38