Of bail-outs and bankruptcies: An empirical study of distressed debt restructurings in Germany


A firm that needs to restructure its debt in order to avoid or remedy a default essentially faces a choice between two alternatives. It may privately renegotiate the affected debt claims in a workout or file a formal bankruptcy petition to resolve financial distress through an in-court proceeding. Financial scholars have long been engaged in discussing the relative merits and shortfalls of both alternatives. Bankruptcy, in general, has the advantage that it protects a distressed debtor from the ‘harassment’ of creditors and mitigates hold-out and information problems among different classes of claimholders [e.g. (1982), (1991)]. In a private workout, on the other hand, firms are likely to avoid much of the direct and indirect costs associated with a formal proceeding [e.g. (1989), (1990)]. This suggests that a firm will choose the workout option if settling this way leaves the firm appreciably more valuable and if unanimous consent among all claimants is feasible. If, however, the affected parties cannot agree on how to share the alleged benefits associated with settling out-of-court, then formal bankruptcy may be the dominant option even though the combined wealth of all parties is ultimately lower [e.g. (1989), (1989)]. Yet, despite these relatively precise predictions provided by theory, empirical results have remained sparse and inconclusive. In particular, there exists little evidence on how firms actually choose between an in- and out-of-court resolution of distress, and to what extend firm value is affected by that choice. Moreover, we currently know little about how the choice between workout and bankruptcy is affected by the design of national bankruptcy legislation. Much of this lack of evidence is attributable to the difficulty to obtain exhaustive data.1 This holds especially for corporate Germany where, until fairly recently, most of the restructuring activity occurred without public disclosure.2


Stock Return Abnormal Return Public Debt Market Reaction Trade Credit 
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