INFORMATION PROBLEMS, CONFLICTS-OF-INTEREST, AND ASSET STRIPPING - CHAPTER-11 FAILURE IN THE CASE OF EASTERN-AIRLINES

Eastern Airlines' bankruptcy illustrates the devastating effect on fir m value of court-sponsored asset stripping, i.e., the use of creditors ' collateral to invest in high-variance negative net present value pro jects. During its bankruptcy, Eastern's value dropped over 50%. A subs tantial portion of this value decline occurred because an overprotecti ve court insulated Eastern from market forces and allowed value-destro ying operations to continue long after it was clear that Eastern shoul d have been shut down. The failure of Eastern's Chapter 11 demonstrate s the importance of having a bankruptcy process that protects a distre ssed firm's assets, not simply from a run by creditors, but also from overly optimistic managers and misguided judges. (C) 1998 Elsevier Sci ence S.A. All rights reserved.