London Business School and Anderson School of Management, UCLA, respectively. We thank Laura Quinn for collecting some of the data. We wish to thank members of the legal fraternity who have given us valuable advice on Chapter 11 proceedings including Judge Samuel Bufford, Professor R. Jordan (School of Law, UCLA), Ken Klee, Professor T. Jackson (School of Law, University of Virginia), and Leo Herzel (Mayer, Brown and Platt). We would also like to thank Mr. W. A. Mallory (Chief Financial Officer, Wickes) for giving us his insights on the reorganization process of Wickes Group. We are grateful to David Hirshleifer and Ted Anderson for valuable discussions. This paper was presented at seminars at UBC, UCLA, UNC Chapel Hill, LSE, City Business School, London Business School, the University of Virginia at Charlottesville, Keele University, and Warwick University. We are grateful for the numerous suggestions and comments of participants, especially those of Jim Brandon, Dick Brealey, Rick Boebel, David Brown, Bob Conroy, Phil Dybvig, Bob Eisenbeis, Mark Flannery, Robert Harris, Stewart Hodges, Mervyn King, Colin Mayer, Stan Ornstein, Eric Rasmusen, Dick Roll, Eduardo Schwartz, Steve Schaefer, Mike Selby, Eli Talmor, Anjan Thakor, Sheridan Titman, Ian Walker, David Webb, and Joe Williams. The paper was presented at the Annual Meeting of the American Finance Association at New York, 1988. We wish to thank our discussant Robert Damon for helpful comments. We wish to acknowledge financial support from UCLA's Centre for Finance and Real Estate. This work was begun when one of the authors was visiting UCLA.
An Empirical Investigation of U.S. Firms in Reorganization
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 3, pages 747–769, July 1989
How to Cite
FRANKS, J. R. and TOROUS, W. N. (1989), An Empirical Investigation of U.S. Firms in Reorganization. The Journal of Finance, 44: 747–769. doi: 10.1111/j.1540-6261.1989.tb04389.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
The purpose of this paper is to understand the institutional features of Chapter 11 from an empirical examination of thirty firms that have emerged from reorganization. We find the recontracting framework of Chapter 11 to be complex, lengthy, and costly. Violations of absolute priority in favor of stockholders are frequently encountered. These deviations may result from the bargaining process of Chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder-oriented management to preserve firm value. An example of such recontracting addresses Myers' underinvestment problem. An investigation of the effects of Chapter 11 on the pricing of risky debt is also provided.