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

Weiss, Lawrence A.; Wruck, Karen H.

doi:10.2139/ssrn.60064

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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

See all articles by Lawrence A. Weiss

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: 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