Essays on distressed corporate restructuring in the United States

The three essays constituting this dissertation attempt to add to the existing body of literature of the subject of distressed restructuring. The essays address three questions that have not been satisfactorily answered. The first question is the role of management in distressed restructuring. Published papers assume that the management represents the interest of equity in dealing with the creditors. However, anecdotal and empirical evidence suggest that restructuring outcome are frequently influenced by the private interest of the management, which is not always in line with that of equity. The first essay established an analytical framework, in which the management is allowed to pursue its own interest, and identifies equilibrium behavior as a result of the interaction amongst the management, the shareholders, and the creditors. The analytical model assumes that the distressed firm faces a risky future, and that the claimholders are at an information disadvantage to the management, whose behavior cannot be perfectly monitored. The model employs a sequential bargaining process and demonstrates that, with asymmetric information where the management knows more about the firm value, the management may have incentives to misrepresent firm value and propose suboptimal restructuring. Such incentives will lead to losses in economic efficiency and social welfare, as well as damages to the interests of the claimholders.; The second essay is an empirical study of refinancing patterns in distressed capital restructuring. The aim is to study the relations between the firm's refinancing pattern and its pre-restructuring financial and operational conditions, as well as the relations between the firm's refinancing pattern and its restructuring outcome and post-restructuring performance. The essay shows that the patterns of distressed refinancing are largely endogenous to the firms' pre-bankruptcy financial and operational conditions, where the stronger firms tend to use more debt instruments whereas the weaker ones tend to use more equity instruments. In terms of restructuring outcome and post-restructuring performance, refinancing with debt is associated with the highest creditors' recovery rate while refinancing with equity typically leads to poor post-restructuring performance. The third essay is an empirical study of the financial characteristics that may determine the outcome of bankruptcy reorganization. The study establishes a Logit predictive model using financial ratios assembled from the sample firms' accounting data. The model suggests that the probability of a successful reorganization relates positively to the firm's operating margin and R&D spending, and negatively to the measures of financial distress. The model correctly classifies 85% of the firms in the estimation sample, and correctly predicts for 62% of the firms is the holdout sample.