Resolution of Financial Distress: Debt Restructurings via Chapter 11, Prepackaged Bankruptcies, and Workouts

TLDR

The study empirically examines a comprehensive sample of firms undergoing Chapter 11 reorganizations, prepackaged bankruptcies, and workouts. The authors analyze firm‑level data on these restructuring options to assess the determinants of each choice. The results show that the decision to restructure depends on leverage, liquidity crisis severity, creditor coordination, and economic distress magnitude, with economically viable firms preferring workouts and prepackaged bankruptcies used by viable firms facing immediate liquidity problems, thereby complementing theoretical models.

Abstract

This paper examines empirically a comprehensive sample of firms undertaking Chapter 11 reorganizations, prepackaged bankruptcies, and workouts. We provide evidence that the restructuring decision depends on the degree of the firm's leverage, the severity of its liquidity crisis, the extent of creditor's coordination, and the magnitude of its economic distress. The results complement theoretical models of debt restructuring choices. We find that economically viable firms prefer workouts. Further, prepackaged bankruptcies are used by firms that are economically viable but face immediate liquidity problems.