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
Date Written: November 8, 1997
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: Suggested Citation