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

We investigate the financial recontracting of firms completing distres sed exchanges and those reorganizing under Chapter 11. We find that re covery rates for creditors, on average, are higher in distressed excha nges 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. Als o, cash is used more extensively to redeem creditors' claims in Chapte r 11 than in distressed exchanges. The greater use of cash can be attr ibuted to provisions of the Bankruptcy Code that permit conservation o f cash and facilitate asset sales.