AN EMPIRICAL-EXAMINATION OF PREPACKAGED BANKRUPTCY

Analysis of 49 prepackaged bankruptcies allows identification of the economic gains from this form of restructuring. Results show that the direct costs of prepacks are comparable to those previously reported for ''traditional'' bankruptcies. Firms routinely pay the pre-bankruptcy expenses of creditor groups, so most direct expenses are incurred prior to filing. The gains from a prepack stem from binding holdouts to a negotiated agreement and from the tax effects of future use of net operating loss carryforwards. Significant tax savings can result from completing a prepack instead of an exchange offer, indicating the importance of tax considerations in firms' restructuring decisions.