Center for Law and Economic Studies
We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of the absolute priority rule).
Jason R. Donaldson, Edward R. Morrison, Giorgia Piacentino & Xiaobo Yu,
Restructuring vs. Bankruptcy,
Columbia Law & Economics Working Paper No. 630
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2706