Hedge Funds and Chapter 11



  • KAI LI,


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    • Jiang is with Columbia University, Li is with the University of British Columbia, and Wang is with Queens University. We thank our team of dedicated research assistants, Gregory Duggan, Sam Guo, Bobby Huang, and Greg Klochkoff. We also thank Lynn LoPucki at UCLA and Ben Schlafman at New Generation Research for their help on data collection, an anonymous referee, an Associate Editor, Cam Harvey (Editor), Susan Christoffersen, Michael Halling, Jay Hartzell, Robert Kieschnick, George Lee, Adam Levitin, Yinghua Li, Michael Meloche, Jeff Pontiff, Michael Schill, David Skeel, Keke Song, Johan Sulaeman, David Thesmar, Albert Wang, and seminar and conference participants at Queen's University, Southern Methodist University, University of British Columbia, University of California at San Diego, University of Texas at Dallas, the 2009 International Conference on Corporate Finance and Governance in Emerging Markets, the 7th Financial Management Napa Conference on Financial Markets Research, the Second Paris Spring Corporate Finance Conference, the Financial Intermediation Research Society Conference, the 2010 China International Conference in Finance, the Research Conference at University of Oregon, the 2010 Northern Finance Association Meetings, the 2010 AIM Center Conference at University of Texas at Austin, and the 2011 Western Finance Association Meetings for helpful comments. All authors acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada (SSHRC). Li further acknowledges financial support from the Sauder School SSHR Research Grant and the Bureau of Asset Management Research Grant, and Wang further acknowledges the financial support from the Queen's School of Business. All remaining errors are our own.


This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter's loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of key employee retention plan, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims.