Distressed Firm Restructurings and Hedge Funds with Expertise: Saviors or Vultures?

Abstract

We model restructuring when hedge funds with expertise in navigating distress intervene. Whether hedge funds help distressed firms or act like vultures are two sides of the same coin. Interventions help when firm prospects are bright and assets are not easily redeploy-able. Interventions are vulture like when bankruptcy is costly and fire sale conditions prevail in the market for distressed assets. Positive outcomes are more likely when funds intervene by acquiring equity though acquiring debt is more likely. These effects are the result of systematic changes in expectations and strategies of firms' other claimants in response to hedge fund intervention.