Bankruptcy and Financial Distress

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Sheraton Ballroom III
Hosted By: American Finance Association
  • Chair: Edith Hotchkiss, Boston College

Bankruptcy and the Cost of Organized Labor: Evidence from Union Elections

Murillo Campello
,
Cornell University and NBER
Janet Gao
,
Indiana University
Jiaping Qiu
,
McMaster University
Yue Zhang
,
University Catholic Louvain and McMaster University

Abstract

Unionized workers are entitled to special treatment in bankruptcy court. This is detrimental to other corporate stakeholders in default states, with senior, unsecured creditors ("impaired claim holders") standing to lose the most. We gather data on union elections covering several decades and employ a regression discontinuity design to identify the effect of worker unionization on bondholders' wealth. Closely-won union elections lead to significant losses to bond values. Unionization is associated with longer, more convoluted bankruptcy proceedings and higher fees and expenses paid in court. All of these costs diminish corporate asset values, aggravating bondholders' losses

The Privatization of Bankruptcy: Evidence From Financial Distress in the Shipping Industry

Julian Franks
,
London Business School
Oren Sussman
,
University of Oxford
Vikrant Vig
,
London Business School

Abstract

We study the resolution of financial distress in shipping, where the ex-territorial nature of assets has distanced the industry from on-shore bankruptcy legislation. We demonstrate how contracts and private institutions have adapted to the industry's special circumstances so as to deliver an effective resolution of financial distress. We investigate three costs of distress: coordination failures leading to the arrest of ships, the direct costs of arrest and auction, and the fire sale discount. We find that most arrests are not caused by coordination failures but rather are precipitated by debtors whose equity is far out of the money and where the ships are close to their break up values. The direct costs of arrest and auction are 8% of a vessel's value, and there is an average fire sale discount of 26%. However, when we control for the low quality of such ships (due to under-maintenance), their low value, and corrupt versus non corrupt ports, the discount virtually disappears. The results suggest that bankruptcy laws that are justified by coordination failures between creditors and large fire sale discounts, may not be necessary, at least for some industries.

Bankruptcy Law, Private Benefits, and Risk-Taking

David Schoenherr
,
Princeton University

Abstract

Exploiting a bankruptcy reform in Korea, I examine how shareholders' and managers' personal bankruptcy costs affect firms' financing and investment decisions. Under the pre-reform auction system incumbent management is forced to resign and the firm is sold to new investors. In contrast, under the post-reform management stay system, existing shareholders and incumbent management stay in control of the firm during bankruptcy proceedings. I find that firms curb risk-taking under the auction system, when bankruptcy states are costly for managers and shareholders. Specifically, firms take on lower leverage, forego profitable investment projects, and undertake less innovation under the auction regime. The effects are stronger for firms where private benefits of control are large and firms for which managers' wealth is concentrated in the firm.

Corporate Leverage and Employees’ Rights in Bankruptcy

Andrew Ellul
,
Indiana University, CEPR, CSEF, and ECGI
Marco Pagano
,
University of Naples Federico II

Abstract

The seniority of employees’ claims in the liquidation of insolvent firms and their rights in firm restructuring vary greatly across countries. These rights of employees are predicted to have different effects on corporate leverage depending on whether firms use debt strategically in wage negotiations or are credit-constrained. We test these predictions on a panel of 13,809 companies in 28 countries, using novel, questionnaire-based measures of employees’ rights in bankruptcy. We find that increases in the value of firms’ real estate or profits are associated with larger increases in leverage by companies whose employees have strong seniority in liquidation and weaker rights in restructuring, consistently with the strategic use of leverage, not with credit rationing.
Discussant(s)
David Matsa
,
Northwestern University
Sreedhar Bharath
,
Arizona State University
Sergei Davydenko
,
University of Toronto
Nittai Bergman
,
Massachusetts Institute of Technology
JEL Classifications
  • G3 - Corporate Finance and Governance