Troubled debt restructurings

debtTroubled debt restructurings

An empirical study of private reorganization

of firms in default*

Stuart C. Gilson
The Unicersity of Texas at Austin, Austin, TX 78712, USA

Kose John and Larry H.P. Lang
New York University, New York, NY 10003, USA
Received November 1989, final version received May 1990

This study investigates the incentives of financially distressed firms to restructure their debt
privately rather than through formal bankruptcy. In a sample of 169 financially distressed
companies, about half successfully restructure their debt outside of Chapter 11. Firms more
likely fo restructure their debt privately have more intangible assets, owe more of their debt to
banks, and owe fewer lenders. Analysis of stock returns suggests that the market is also able to
discriminate er ante between the two sets of firms, and that stockholders are systematically
better off when debt is restructured privately.

Introduction

With, the proliferation of leveraged buyouts (LBOs) and other highly
leveraged transactions, there has been growing popular concern that the
corporate sector is being burdened with too much debt. Much of this concern
*We would like to thank Edward Altman. Yakov Amihud, Sugato Bhattacharya, Keith Brown,
Robert Bruner, T. Ronald Casper, Charles D’Ambrosio, Larry Dann, Oliver Hart, Gailen Hite,
Max Holmes, Scott Lee, Gershon Mandelker. Scott Mason, Robert Merton, Wayne Mikkelson,
Megan Partch, Ramesh Rao, Roy Smith, Chester Spatt, Gopala Vasudevan, and Richard West
for their helpful comments. We are especially grateful to Michael Jensen (the editor) and Karen
Wruck (the referee) for their many detailed and thoughtful suggestions. This paper has also
benefited from the comments of participants at the 1989 American Economic Association
Meetings, the conference on ‘The Structure of Governance of Enterprise’ at the Harvard
Business School, and seminars at Dartmouth College, the Harvard Business School. the University
of Oregon, and the University of Pittsburgh. The second author acknowledges support from
the Yamaichi Faculty Fellowship and the Garn Institute of Finance.

Troubled debt restructurings

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