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Author: Cesar E. Tamayo
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 96
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Book Description
This dissertation investigates the role that capital market imperfections play in shaping the behavior of firms along several dimensions: capital structure, investment policies, bankruptcy decisions and life-cycle dynamics. The dissertation puts together two separate but closely related papers, both of which are concerned with bankruptcy and firm financing under asymmetric information and limited enforcement. In Chapter 2, I present a model of firm finance that encompasses imperfect investor protection, risk aversion and costly state verification. Imperfect investor protection is introduced through the limited liability clause of the financial contract, and captures the maximum fraction of returns that the investor can seize from the entrepreneur. A positive lower bound on consumption then interacts with entrepreneurial risk aversion in non-trivial ways. I characterize optimal contracts and study the conditions under which standard debt is optimal. Under suitable assumptions about the structure of the problem, standard debt contracts (SDCs) are optimal if and only if investor protection is sufficiently low. On the other hand, low investor protection results in higher funding costs and bankruptcy probabilities. In my setting, this implies that when SDCs are optimal, lowering investor protection reduces the entrepreneur's welfare. Numerical examples show that moderate changes in investor protection can have large effects on the terms of the contract and on the entrepreneur's welfare. Finally, I study the role of leverage and consider the welfare consequences suboptimally implementing standard debt contracts. In Chapter 3 I study firm dynamics and industry equilibrium when firms under financial distress face a non-trivial choice between alternative bankruptcy procedures. Given limited commitment and asymmetric information, financial contracts specify default, renegotiation and reorganization policies. Default occurs in equilibrium and leads to either liquidation or renegotiation. Renegotiation entails a redistribution of social surplus, while reorganization takes the form of enhanced creditor monitoring. Firms with better contract histories are less likely to default, but, contingent on default, firms with better outside options successfully renegotiate, in line with the empirical evidence. Unless monitoring is too costly, renegotiation leads to reorganization, which resembles actual bankruptcy practice. I calibrate the model to match certain aspects of the data on bankruptcy and firm dynamics in the U.S. My counterfactual experiments show that, compared with an economy with liquidation only, the rehabilitation of firms (renegotiation and reorganization) has a sizable negative effect on exit rates and size dispersion, and positive effects on average size and productivity.
Author: Cesar E. Tamayo
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 96
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Book Description
This dissertation investigates the role that capital market imperfections play in shaping the behavior of firms along several dimensions: capital structure, investment policies, bankruptcy decisions and life-cycle dynamics. The dissertation puts together two separate but closely related papers, both of which are concerned with bankruptcy and firm financing under asymmetric information and limited enforcement. In Chapter 2, I present a model of firm finance that encompasses imperfect investor protection, risk aversion and costly state verification. Imperfect investor protection is introduced through the limited liability clause of the financial contract, and captures the maximum fraction of returns that the investor can seize from the entrepreneur. A positive lower bound on consumption then interacts with entrepreneurial risk aversion in non-trivial ways. I characterize optimal contracts and study the conditions under which standard debt is optimal. Under suitable assumptions about the structure of the problem, standard debt contracts (SDCs) are optimal if and only if investor protection is sufficiently low. On the other hand, low investor protection results in higher funding costs and bankruptcy probabilities. In my setting, this implies that when SDCs are optimal, lowering investor protection reduces the entrepreneur's welfare. Numerical examples show that moderate changes in investor protection can have large effects on the terms of the contract and on the entrepreneur's welfare. Finally, I study the role of leverage and consider the welfare consequences suboptimally implementing standard debt contracts. In Chapter 3 I study firm dynamics and industry equilibrium when firms under financial distress face a non-trivial choice between alternative bankruptcy procedures. Given limited commitment and asymmetric information, financial contracts specify default, renegotiation and reorganization policies. Default occurs in equilibrium and leads to either liquidation or renegotiation. Renegotiation entails a redistribution of social surplus, while reorganization takes the form of enhanced creditor monitoring. Firms with better contract histories are less likely to default, but, contingent on default, firms with better outside options successfully renegotiate, in line with the empirical evidence. Unless monitoring is too costly, renegotiation leads to reorganization, which resembles actual bankruptcy practice. I calibrate the model to match certain aspects of the data on bankruptcy and firm dynamics in the U.S. My counterfactual experiments show that, compared with an economy with liquidation only, the rehabilitation of firms (renegotiation and reorganization) has a sizable negative effect on exit rates and size dispersion, and positive effects on average size and productivity.
Author: Ken-ichi Tatsumi
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 294
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Author: Mohammad Mahdi Fahimi
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 0
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This dissertation consists of two essays in financial economics. The first essay, included in Chapter 2, concerns the effect of debtor-in-possession (DIP) financing and DIP financing lenders on the outcome of Chapter 11 bankruptcy. When firms file for protection under Chapter 11 bankruptcy, their access to outside financing will be limited. The Bankruptcy Reform Act of 1978 has resolved this issue under section 364 of the US Bankruptcy Code by defining laws for the DIP financing, which is the unique type of financing available to firms filing for Chapter 11 bankruptcy. DIP financing is usually senior to all other securities issued by a firm and violates the absolute priority rule by standing ahead of a company’s existing debts for payment. Among the characteristics of DIP financing, limited attention has been given to the type of lender of the DIP financing. There is not much empirical evidence on whether financing a DIP loan from different types of lenders can lead to different bankruptcy outcomes. In this essay, I investigate the role of DIP financing, especially the DIP lender in the bankruptcy process. I provide evidence for the role of DIP lender, bank versus non-bank, in bankruptcy outcome, while controlling for potential endogeneity of the lender’s type. In order to control for the endogeneity of the DIP lender type, I use an instrumental variable (IV) approach. My results show that even after controlling for the endogeneity of the lender type, the source of the DIP loan still matters for the outcome of the bankruptcy process. More specifically, receiving the DIP loan from banks increases the likelihood of emerging from bankruptcy as a going concern for the bankrupt firm. The second essay, included in Chapter 2, concerns predicting bankruptcy outcome using a machine learning approach and using the bankruptcy outcome predictions to predict firms’ CDS spreads. First, I develop a machine learning model using Extreme Gradient Boosting to predict the outcome of the bankruptcy. I compare the performance of this model with that of a traditional logistics regression model and show that, while both perform well, the machine learning model outperforms the traditional model, mainly because it is able to identify non-linear patterns in the data. I, then, use the predicted probabilities of emerging from bankruptcy, combined with the predicted probabilities of bankruptcy, produced by a second machine learning model, to predict CDS spreads. I show that the predicted probability of bankruptcy and probability of emerging from bankruptcy can be used to predict firms’ CDS spreads and can improve the prediction power of benchmark models. This study contributes to the bankruptcy and bankruptcy outcome prediction literature by providing empirical evidence of the association between a firm’s characteristics and its bankruptcy outcome. I also show that using machine learning techniques to predict the bankruptcy outcome can help predict CDS spreads more accurately.
Author: Felipe Cortés
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 130
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This dissertation seeks to understand the effect of information asymmetries on corporate liquidity choices and efficiency of bankruptcy resolution, and the role of pooling and reputational concerns on an originator's incentives to invest in signal precision. The first chapter identifies and provides a causal estimate of the economic importance of information asymmetries between corporate insiders and outsiders in equity markets on small public firms decision to hoard liquid assets. The second chapter develops a theory of securitization in which the originator's incentives to screen are endogenized and affected by reputational concerns to investigate the effect of the pooling of assets on screening and systematic risk. In the third chapter, we investigate the impact of relative bargaining power of firms over creditors during bankruptcy on ex-post firm performance, once the firm emerges out of bankruptcy. Although existing theories predict a causal link between firm opaqueness and firm cash holdings, endogenous and coarse measures of opaqueness hinder the identification of this link. Using the discontinuous requirement of financial reporting introduced by Sarbanes-Oxley Act, Section 404, we estimate the causal effect of opaqueness on cash holdings. We show that firms that comply with Section 404 and provide more reliable information exhibit lower cash holdings compared to observationally similar firms. Further, compliant firms that hold less cash exhibit higher R & D expenditures relative to non-compliant firms. This difference sheds light on the opportunity costs of holding cash. In the second chapter, we develop a theory of securitization in which the securitization of large asset pools leads to a reduction in idiosyncratic risk but an increase in systematic risk, and the originate-to-distribute model of securitization is not sufficient for this result. The model is one in which the originator's screening incentives are endogenized, and screening and pooling of loans in securitization have both idiosyncratic and systematic risk consequences. The originator's screening incentives are affected by career concerns as well as by the impact of screening on the risk of the securitized portfolio. The effect of securitization on idiosyncratic risk and systematic risk occurs via a dilution of the originator's screening incentives, with greater dilution occurring as more loans are added to the pool being securitized. Further, when we endogenize the information acquisition incentives of the investors who purchase securitized claims, we find that there is an interaction between these incentives and the screening incentives of originators. A weakening of the issuer's screening incentives leads to weaker incentives for investors to become informed and a higher valuation uncertainty, creating a feedback effect that further weakens the issuer's screening incentives. In the third chapter of my thesis evaluates the impact of bargaining between management and creditors on bankruptcy outcome and ex-post efficiency of bankruptcy resolution. We find that firms in which creditors (management) exerts greater (lower) influence in the negotiation process are more likely to be liquidated. Increase in power of creditors during the bankruptcy negotiations is associated with lower likelihood of re-filing and superior post-bankruptcy profitability among firms that emerge. However such ex-post efficiency gains come at a cost as increase in power of creditors also leads to a lengthier bankruptcy. The unique aspect of our analysis is our ability to correct for the selection bias engendered by our focus on firms that emerge out of bankruptcy using the Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA) passed in 2005 as an exogenous shock to the likelihood of liquidation. Collectively, our results lend credence to the idea of allocating greater power to creditors in bankruptcy proceedings.
Author: Jan Szilagyi
Publisher:
ISBN:
Category : Bankruptcy
Languages : en
Pages : 380
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Author: Ken-ichi Tatsumi
Publisher:
ISBN:
Category :
Languages : en
Pages : 146
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Author: Baris Korcan Ak
Publisher:
ISBN:
Category :
Languages : en
Pages : 89
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Financial statement analysis has been used to assess a company's likelihood of financial distress - the probability that it will not be able to repay its debts. In the dissertation at hand, I provide two essays that add to the literature on the application of financial analysis to distressed firms. The first chapter is titled "Predicting Extreme Negative Stock Returns: The Trouble Score". This chapter examines the ability of accounting information to predict large negative stock returns. The Trouble Score addresses an important gap in the literature. Existing distress risk measures focus on predicting the most extreme negative events such as bankruptcy. However, such events are extremely rare and capture only the most financially distressed firms. There are many firms that experience financial distress but do not declare bankruptcy. By analyzing firms that experience a stock price decline of 50 percent or more, the T-Score enables researchers to capture extreme negative outcomes for corporate shareholders beyond commonly used financial distress measures such as bankruptcies and technical defaults. The second chapter is titled "Relative Informativeness of Top Executives' Trades in Financially Distressed Firms Compared to Financially Healthy Firms". This chapter examines the informativeness of trades by top executives in firms experiencing varying levels of financial distress. Open-market transactions become differentially costly for the top executives of firms in financial distress. If insiders in a financially distressed firm buy the firm's stock, they expose their financial capital and their human capital to the risks associated with the firm, thus making their trade differentially costly. It is conjectured that if the managers sell, they are subject to higher litigation risk. These differential costs increase the credibility and therefore the informativeness of the signal extracted from top executives' trades in financially distressed firms. Consistent with this, I find that there is a positive association between top executives' trades and future fundamental firm performance only in the presence of financial distress. In addition, these trades provide incremental information about the likelihood of survival over the existing distress risk measures. I find that the investors' reaction to the disclosure of top executives' purchases increases with the level of financial distress. The reaction is most negative following top executives' sales in the most financially distressed firms. Finally, I show that there is a delay in the price reaction following top executives' trades. A trading strategy that takes a long position in financially distressed firms in which insiders are net purchasers, earns future monthly abnormal profits of between 1.43 and 2.08 percent. This finding suggests that top executives' trades reveal information that can be used to distinguish financially distressed firms that have good future prospects.
Author: Emanuele Tarantino
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 140
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Author: Benjamin Charles Iverson
Publisher:
ISBN:
Category :
Languages : en
Pages :
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The first essay tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 as an exogenous shock to court caseloads, I estimate the impact of bankruptcy caseload changes on the outcomes of firms in Chapter 11. I find that as bankruptcy judges become busier they tend to allow more firms to reorganize. Firms that reorganize in busy courts spend longer in bankruptcy, while firms that are dismissed from busy courts are more likely to re-file for bankruptcy within three years of their original filing. In addition, busy courts impose costs on local banks, which report higher charge-offs on business lending when caseload increases.
Author: Gunjan Seth
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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