A COMPARISON OF FINANCIAL RECONTRACTING IN DISTRESSED EXCHANGES AND CHAPTER-11 REORGANIZATIONS

We investigate the financial recontracting of firms completing distressed exchanges and those reorganizing under Chapter 11. We find that recovery rates for creditors, on average, are higher in distressed exchanges than in Chapter 11 reorganizations, as are equity deviations from absolute priority. The difference in deviations potentially provides valuable information on the higher costs of formal reorganization. Also, cash is used more extensively to redeem creditors' claims in Chapter 11 than in distressed exchanges. The greater use of cash can be attributed to provisions of the Bankruptcy Code that permit conservation of cash and facilitate asset sales.