Debtor-in-Possession Financing and the Resolution of Uncertainty in Chapter 11 Reorganizations

Dhillon, Upinder; Noe, Thomas H.; Ramirez, Gabriel G.

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Debtor-in-Possession Financing and the Resolution of Uncertainty in Chapter 11 Reorganizations

Posted: 14 Apr 1998

See all articles by Upinder Dhillon

Upinder Dhillon

SUNY at Binghamton - School of Management

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Abstract

This paper investigates the use of debtor-in possession (DIP) financing by firms reorganizing under the protection of Chapter 11. A model is developed in which there is asymmetric information between the creditors of a bankrupt firm and its management. In this context, it is demonstrated that reliance on DIP financing resolves informational asymmetries regarding the true economic value of bankrupt firms. Empirical results support the model's conclusions. The signaling role of DIP finance is evidenced both by positive stock and bond price reactions to DIP announcements and the fact that firms employing DIP financing have more successful reorganizations.

JEL Classification: D82, G33

Suggested Citation: Suggested Citation

Dhillon, Upinder S. and Noe, Thomas H. and Ramirez, Gabriel G., Debtor-in-Possession Financing and the Resolution of Uncertainty in Chapter 11 Reorganizations. Available at SSRN: https://ssrn.com/abstract=6301