Financial Restructuring in Fresh Start Chapter 11 Reorganizations
Randall A. Heron
Indiana University - Kelley School of Business
University of Iowa - Henry B. Tippie College of Business
Kimberly Rodgers Cornaggia
Pennsylvania State University - Department of Finance
June 23, 2008
Financial Management Vol. 38. No. 4. pp. 727-745.
We find that firms substantially reduce their debt burden in “fresh-start” Chapter 11 reorganizations, yet they emerge with higher debt ratios than what is typical in their respective industries. While cross-sectional regressions reveal that post-reorganization debt ratios are more in line with the predictions of the static-tradeoff theory, they also reveal that pre-reorganization debt ratios affect post-reorganization debt ratios. Collectively, these results suggest that impediments in Chapter 11 prevent firms from completely resetting their capital structures. We also find that firms that reported positive operating income leading up to Chapter 11 emerge faster, suggesting that it is quicker to remedy strictly financial distress than economic distress.
Number of Pages in PDF File: 35
Keywords: Chapter 11, Capital Structure, Fresh Start, Restructuring
JEL Classification: G32, G33
Date posted: March 21, 2006 ; Last revised: May 14, 2014