Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress

Abstract

Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000-2014, we find that firms with financial institutions’ debt-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are over-secured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to establish causality. Firms with simultaneous holdings experience higher stock returns and are not more likely to reenter into financial distress. The evidence suggests that the mitigation of shareholder-creditor conflicts results in cost-effective resolutions of financial distress.