PPT Slide

Bankruptcy resolution

Weiss analyzed 37 firms (1990, J. of Fin. Econ. p.285-314) for the

direct costs and violation of priority of claims.

1. Direct costs encompass the legal and administrative fees, including

the costs of lawyers, accountants, etc. They average 3.1% of the

book value of debt plus market value of equity at the end of the

fiscal year preceding bankruptcy – small impact on debt valuation.

2. Priority of claims is violated for 29 of the 37 firms studied.

• The costly valuation hearings may make creditors approve a

plan in which their priority is violated.

• Tax-law cooperation of the equity holders is essential to preserve

tax-loss carryforwards.