Does Debtor-In-Possession Financing Add Value?

Abstract

Management Association International (Orlando, 1999). I would also like to thank Jonathan Eaton and Russell Lloyd for providing access to the databases used in this study. Financial support from Fundação para a Ciência e a Tecnologia is gratefullyDoes debtor-in-possession financing add value? In this paper I investigate the role of debtor-in-possession (DIP) financing in the bankruptcy process and find that post-petition loans are associated with a greater probability of successful reorganization (i.e. lower probability of liquidation). This positive impact is however reduced when very senior forms of DIP financing (e.g. priming) are used, regardless of the DIP lender being a prepetition creditor as well. The size of the new loan is shown to matter. While claimants ’ recovery rates in DIP firms are at best similar to those in non-DIP firms, the (relative) size of DIP financing is shown to have a positive impact on recovery rates. Since equity-holders typically recover nothing in the event of a liquidation, I