Financial Distress and Restructuring Models

Yehning Chen, J. Fred Weston and Edward Altman

Financial Management, 1995, vol. 24, issue 2

Abstract: This paper provides a synthesis of the theoretical literature on financial distress. It employs a two-state framework, which more clearly captures the generalizations of the more complex models. The equation systems that are derived permit the development of a series of examples that convey the logic and intuitions behind the generalizations. The graphics help illuminate aspects of financial distress not treated in the previous literature. The role of risk is treated explicitly. Alternative assumptions generate different predictions of the effects of financial distress on investment efficiency and restructuring strategy. Central to these strategies are the recontracting arrangements between owners, creditors, and the other relevant stakeholders. The resulting framework permits an evaluation of some central provisions of the prevailing U.S. bankruptcy laws.

Date: 1995
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