The role of high leverage in corporate restructuring and the popularity of junk bonds (original-issue, high-yield bonds) have been important aspects of the corporate finance scene in the 12mh659017.rei 1980s. As more and more firms have defaulted on their debt and filed for bankruptcy in the recent recession, financial economists, financial managers, and legal scholars have become increasingly interested in understanding how firms deal with financial distress. A very active academic literature has developed in recent years on various aspects of dealing with financial distress and the private and court-supervised mechanisms of resolving default. At the same time, investors have become increasingly concemed about default risk and valuation of distressed securities incorporating the, institutional realities of troubled debt restructuring. The purpose of this special issue is to showcase new empirical and theoretical research on these topics, i.e., managing fmancial distress and valuing corporate securities incorporating payouts in troubled reorganizations. While the literature on the first topic, broadly defined, has become quite extensive in recent years, the literature on the second topic is still in its infancy. New research on these topics is presented in the nine papers that appear in this special issue. The purpose of this survey article is to summarize and synthesize the recent research in' the areas of financial distress, asset and debt restructuring, bankruptcy and valuation of distressed securities.1 The new research featured in this special issue is also surveyed here. Additionally, I present an agenda for future research in the areas of financial distress, design of contracts and procedures to deal with it, and techniques for the valuation of corporate securities and contracts incorporating strategies and outcomes induced by the legal system goveming breach of contractual promises. The rest of the paper is organized as follows. In Section I, a simple conceptual framework for managing financial distress is presented which provides a scheme for organizing the survey. Theoretical work and recent empirical evidence on asset restnicturing is summarized in Section II. Recent theory and evidence on private debt restructuring (debt workouts) is collected in Section III. Theoretical and empirical work on the formal bankruptcy (Chapter II) process is reviewed in Section IV. Efficiency aspects of the current U.S. bankruptcy procedure, the design of an optimal procedure and proposals for bankruptcy reform are discussed there. In Section V, the valuation of corporate securities and contracts with significant probabilities of default (triggering renegotiation and legal resolution) is discussed. Each of these sections includes a brief survey of relevant existing literature, an overview of the papers in this special issue which fall in that area, and some suggestions for future research. Section VI contains an agenda for further research and concluding remarks.
