Debtor-in-Possession Financing

24 Pages Posted: 29 May 2007

See all articles by Sris Chatterjee

Sris Chatterjee

Fordham University - Gabelli School of Business

Upinder Dhillon

SUNY at Binghamton - School of Management

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Abstract

Several recent papers have documented the benefits of Debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of expropriative wealth transfers. In this paper we address this issue by analyzing both stock and bond price data for a comprehensive sample of DIP loans and find significant positive abnormal stock and bond returns at the announcement of DIP loans. Also, we do not find evidence of wealth transfers from junior to senior debt-holders. Further, we examine the DIP loan process in detail and we document important institutional features of DIP loans such as maturity, covenants, fees and interest charges. We find evidence of intense monitoring using covenants. We also find higher fees and charges associated with DIP loans. We argue that overall the results are consistent with the information processing role of financial intermediaries.

Keywords: Bankruptcy, Chapter 11, Bank Loan, DIP financing, DIP, Wealth Effects, Monitoring Costs

JEL Classification: G21, G33

Suggested Citation

Chatterjee, Sris and Dhillon, Upinder S. and Ramirez, Gabriel G., Debtor-in-Possession Financing. Journal of Banking and Finance, Vol. 28, No. 12, pp. 3097-3112, 2004. Available at SSRN: https://ssrn.com/abstract=672321

Sris Chatterjee

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

Upinder S. Dhillon

SUNY at Binghamton - School of Management ( email )

Binghamton, NY 13902-6015
United States
607-777-4381 (Phone)
607-777-4422 (Fax)

Gabriel G. Ramirez (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)

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