Working Paper: CEPR ID: DP3915
Authors: Julian R. Franks; Oren Sussman
Abstract: We use a unique data set to analyse how UK banks deal with small to medium size distressed firms both inside and outside bankruptcy. The approach to bankruptcy is contract-based, with lenders and borrowers relying on procedures written into the debt contract, and where the courts are largely uninvolved. We find that firms in our sample have highly concentrated debt structures and liquidation rights. As a result, the rescue process is largely free of coordination failures and creditors? runs. We find that the principal lender, ?the bank?, makes few concessions to the borrower and that there is a virtual absence of debt forgiveness. Finally, the bank relies heavily on the highly collateralized value of its loan in making the decision to place the distressed firm in bankruptcy.
Keywords: bank lending; bankruptcy; collateral; liquidation rights
JEL Codes: G10; G20; K00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| concentration of liquidation rights (G33) | reduced likelihood of creditors' runs (E44) |
| banks' control over bankruptcy process (G33) | reduced likelihood of creditors' runs (E44) |
| debt structure (G32) | reduced risk of opportunistic behavior from creditors (G33) |
| banks' stance during distress (G21) | reduced debt forgiveness (H63) |
| managerial changes (M54) | improved survival rates (I14) |
| banks' monitoring of restructuring efforts (G21) | improved survival rates (I14) |