Post-Chapter 11 Debt Contracting and Firm Performance

• In Event: Debt Contracting

Abstract

This paper examines the unique properties of debt contracts for …firms emerging
from Chapter 11 bankruptcies. Speci…cally, after controlling for performance and other
covenant determinants, we fi…nd that post-Chapter 11 contracts employ more investment
and liquidity covenants, while they employ less solvency covenants. Also, we fi…nd
that, compared with fi…rms that adopt fresh start accounting, non-fresh-start-accounting
…rms are more likely to use solvency and coverage covenants. Finally, our …findings
imply that liquidity and investment covenants are associated with lower operating
and stock market performance during the post-emergence period. These fi…ndings are
distinguished from the effects of covenants for general universe of …firms.

Authors

• Hanna Lee, University of Maryland

• Kyungran Lee, University of Maryland, College Park

• Gil Sadka, Columbia University