Anatomy of Financial Distress: An Examination of Junk-Bond Issuers.

This paper analyzes the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions. Their main finding is that a firm's debt structure affects the way financially distressed firms restructure. The combination of secured private debt and numerous public debt issues seems to impede out-of-court restructurings and increases the probability of a Chapter 11 filing. In addition, the authors find that, while asset sales are a way of avoiding Chapter 11, they are limited by industry factors: firms in distressed and highly leveraged industries are less prone to sell assets. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.