Lender Control in Chapter 11: Empirical Evidence

31 Pages Posted: 15 Feb 2007  

Greg McGlaun

Proveer Practice Management

Date Written: February 5, 2007

Abstract

Financial economists often assume that control or ownership shifts from equityholders to debtholders after default or bankruptcy. The change in control or ownership solves ex ante contracting problems and ex post incentive problems. However, the mandatory bankruptcy scheme in the US inhibits a simple change in control or ownership from equityholders to debtholders. Some bankruptcy law scholars suggest that debtors and creditors use secured debt contracts as the next best solution. I provide the first non-anecdotal empirical evidence on relations between secured credit and lender control in Chapter 11 of the US Bankruptcy Code. I find evidence that debtors commit to lender control in Chapter 11 through secured debt contracts. The secured debt contracts leave the debtor dependent on external financing in the event of Chapter 11. Once in bankruptcy and dependent on external financing, the debtor and a Chapter 11 lender negotiate a Chapter 11 financing agreement that includes control rights for the Chapter 11 lender, who is often the pre-bankruptcy secured lender. I find support for hypotheses of relations between lender control to Chapter 11 outcomes. For example, debtors dispose of assets sooner in Chapter 11 in the presence of a controlling lender.

Keywords: bankruptcy, Chapter 11, secured credit, control rights

Suggested Citation

McGlaun, Greg, Lender Control in Chapter 11: Empirical Evidence (February 5, 2007). Available at SSRN: https://ssrn.com/abstract=961365 or http://dx.doi.org/10.2139/ssrn.961365

Greg McGlaun (Contact Author)

Proveer Practice Management ( email )

2100 Raybrook SE, Ste 108
Grand Rapids, MI 49546
United States

HOME PAGE: http://www.proveerpm.com

Paper statistics

Downloads
271
Rank
90,988
Abstract Views
1,302