Debtor-in-Possession Financing and the Resolution of Uncertainty in Chapter 11 Reorganizations
Posted: 14 Apr 1998
This paper investigates the use of debtor-in possession (DIP) financing by firms reorganizing under the protection of Chapter 11. A model is developed in which there is asymmetric information between the creditors of a bankrupt firm and its management. In this context, it is demonstrated that reliance on DIP financing resolves informational asymmetries regarding the true economic value of bankrupt firms. Empirical results support the model's conclusions. The signaling role of DIP finance is evidenced both by positive stock and bond price reactions to DIP announcements and the fact that firms employing DIP financing have more successful reorganizations.
JEL Classification: D82, G33
Suggested Citation: Suggested Citation