Working Paper: NBER ID: w3942
Authors: Paul Asquith; Robert Gertner; David Scharfstein
Abstract: This paper examines the events following the onset of financial distress for 102 public junk bond issuers. We find that out-of-court debt relief mainly comes from junk bond - holders; banks almost never forgive principal, though they do defer payments and waive debt covenants. Asset sales are an important means of avoiding Chapter 11 reorganization; however, they may be limited by industry factors. If a company simply restructures its bank debt, but either does not restructure its public debt or does not sell major assets or merge, the company goes bankrupt. The structure of a company's liabilities affects the likelihood that it goes bankrupt; companies whose bank and private debt are secured as well as companies with complex public debt structures are more prone to go bankrupt. Finally, there is no evidence that more profitable distressed companies are more successful in dealing with financial distress; they are not less likely to go bankrupt, sell assets, or reduce capital expenditures.
Keywords: financial distress; junk bonds; capital structure; bankruptcy; debt restructuring
JEL Codes: G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of a company's liabilities (G32) | likelihood of bankruptcy (G33) |
| secured bank and private debt (G21) | likelihood of bankruptcy (G33) |
| asset sales (H82) | likelihood of bankruptcy (G33) |
| industry factors (L19) | asset sales (H82) |
| restructuring bank debt without addressing public debt or selling assets (F34) | likelihood of bankruptcy (G33) |
| presence of subordinated public debt (H63) | limited actions of banks to assist distressed firms (G33) |
| financial performance (G32) | success in managing financial distress (G33) |