Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms

Stuart C Gilson

Journal of Finance, 1997, vol. 52, issue 1, 161-96

Abstract: This study provides evidence that transaction costs discourage debt reductions by financially distressed firms when they restructure their debt out of court. As a result, these firms remain highly leveraged and one-in-three subsequently experience financial distress. Transactions costs are significantly smaller, hence leverage falls by more and there is less recurrence of financial distress when firms recontract in Chapter 11. Chapter 11 therefore gives financially distressed firms more flexibility to choose optimal capital structures. Copyright 1997 by American Finance Association.

Date: 1997
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