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Financial Restructuring in Fresh Start Chapter 11 Reorganizations

Financial Management Vol. 38. No. 4. pp. 727-745.

35 Pages Posted: 21 Mar 2006 Last revised: 14 May 2014

Randall A. Heron

Indiana University - Kelley School of Business

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Date Written: June 23, 2008

Abstract

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.

Keywords: Chapter 11, Capital Structure, Fresh Start, Restructuring

JEL Classification: G32, G33

Suggested Citation

Heron, Randall A. and Lie, Erik and Cornaggia, Kimberly Rodgers, Financial Restructuring in Fresh Start Chapter 11 Reorganizations (June 23, 2008). Financial Management Vol. 38. No. 4. pp. 727-745.. Available at SSRN: https://ssrn.com/abstract=890693 or http://dx.doi.org/10.2139/ssrn.890693

Randall A. Heron (Contact Author)

Indiana University - Kelley School of Business ( email )

Kelley School of Business
801 W. Michigan Street
Indianapolis, IN 46202
United States
317-274-4984 (Phone)

Erik Lie

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

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