Information Problems, Conflicts of Interest and Asset Stripping: Chapter 11's Failure in the Case of Eastern Airlines

Harvard Business School Working Paper No. 97-013, and/or INSEAD Working Paper 96/48/AC

47 Pages Posted: 23 Sep 1996  

Lawrence A. Weiss

Tufts University - The Fletcher School

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance

Date Written: November 8, 1997

Abstract

Eastern Airlines' bankruptcy illustrates the devastating effect of court-sponsored asset stripping-using creditors' collateral to invest in negative net present value "lottery ticket" investments-on firm value. During bankruptcy, Eastern's value dropped over 50%. We show that a substantial portion of this value decline occurred because an over- protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down. The failure of Eastern's bankruptcy demonstrates the importance of the court's role in protecting a distressed firm's assets, not only from a run by creditors, but also from overly optimistic managers.

JEL Classification: G32, G33, G34, J51, J52

Suggested Citation

Weiss, Lawrence A. and Wruck, Karen H., Information Problems, Conflicts of Interest and Asset Stripping: Chapter 11's Failure in the Case of Eastern Airlines (November 8, 1997). Harvard Business School Working Paper No. 97-013, and/or INSEAD Working Paper 96/48/AC. Available at SSRN: https://ssrn.com/abstract=60064 or http://dx.doi.org/10.2139/ssrn.60064

Lawrence A. Weiss

Tufts University - The Fletcher School ( email )

160 Packard Ave
Medford, MA 02155
United States
6176272735 (Phone)
6176273712 (Fax)

Karen H. Wruck (Contact Author)

Ohio State University - Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-5443 (Phone)
614-292-2418 (Fax)

HOME PAGE: http://www.cob.ohio-state.edu/~kwruck

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