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Loews Philadelphia, Lescaze
Association of Financial Economists & American Finance Association
Financial Distress and Bankruptcy
Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM
- Chair: Kose John, New York University
Selling Innovation in Bankruptcy
AbstractWe construct a comprehensive dataset of patent sales in Chapter 11 bankruptcies in all US public firms from 1981 to 2012. We document that 40% of firms sell, on average 18% of, their patents during bankruptcy reorganizations. Innovation sales concentrate in the first two quarters after bankruptcy filing. Firms sell more redeployable and liquid patents, as opposed to selling underexploited patents. This pattern is driven by firms that face "fire-sale" pressures and lack access to external financing. Our results suggest that imminent financing needs in bankruptcy drive innovation sales, and firms proactively avoid market trading frictions in the process.
When Do Firms Risk Shift? Evidence From Venture Capital
AbstractThis paper studies the agency costs of debt and the role of risk shifting as firms face financial distress. The Small Business Investment Company (SBIC) program is a novel setting to evaluate the importance of these costs. It provides participating venture capital funds with debt financing from the U.S. government at a negligible premium to the 10-year Treasury Note. Economic mechanisms that might prevent risk shifting, such as covenants and reputation concerns, are primarily not present in this program. Using a difference-in-differences setting, I find that managers of distressed funds invest in firms with lower credit scores, sales, employment and patenting activity, and are more likely to use equity investments. Distressed funds reallocate capital to riskier firms in their portfolio, rather than searching for new investments. Equityholders respond positively to riskier investments for distressed funds and debtholder losses increase, consistent with the prediction that risk shifting transfers wealth from bondholders to equityholders.
Capital Market Competition and the Resolution of Financial Distress: Evidence from Corporate Bankruptcy Filings
AbstractWe study how credit market competition impacts the resolution of borrowers' distress. By exploiting positive shocks to competition in the banking industry, we document that higher competition leads to a significant decline in the rate of non-financial firms' bankruptcy filings. This decline predominantly stems from a sharp reduction in Chapter 11, as opposed to Chapter 7 filings. Changes in economic conditions, firm fundamentals or banks' preference for risk cannot explain the results. We show that fewer filings are driven by better bank monitoring, higher incentive to to avoid inefficient outcomes, and improved outcomes of private, pre-court workouts. Distressed firms also benefit from improved outcomes and fewer liquidations following a Chapter 11 filing, as well as shorter duration of the legal bankruptcy process.
University of Pennsylvania
- G3 - Corporate Finance and Governance
- G2 - Financial Institutions and Services