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A Theory of Workouts and the Effects of Reorganization Law

42 Pages Posted: 28 Dec 2006  

Robert H. Gertner

University of Chicago - Finance; National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: May 1991

Abstract

We present a model of a financially distressed firm with outstanding bank debt and public debt. Coordination problems among public debtholders introduce investment inefficiencies in the workout process. In most cases, these inefficiencies are not mitigated by the ability of firms to buy back their public debt with cash and other securities--the only feasible way that firms can restructure their public debt. We show that Chapter 11 reorganization law increases investment and we characterize the types of corporate financial structures for which this increased investment enhances efficiency.

Suggested Citation

Gertner, Robert H. and Scharfstein, David S., A Theory of Workouts and the Effects of Reorganization Law (May 1991). NBER Working Paper No. t0103. Available at SSRN: https://ssrn.com/abstract=573103

Robert H. Gertner (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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