Financial distress, bank debt restructurings, and layoffs

A. Jorge Padilla () and Alejandro Requejo ()
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A. Jorge Padilla: CEMFI and CEPR, c/ Casado del Alisal, 5, 28014 Madrid, Spain Universidad Carlos III de Madrid, Departamento de Economía de la Empresa, c/ Madrid 126, 28903 Getafe , Spain NERA, Antonio Maura, 7, 28014 Madrid, Spain
Alejandro Requejo: CEMFI and CEPR, c/ Casado del Alisal, 5, 28014 Madrid, Spain Universidad Carlos III de Madrid, Departamento de Economía de la Empresa, c/ Madrid 126, 28903 Getafe , Spain NERA, Antonio Maura, 7, 28014 Madrid, Spain

Spanish Economic Review, 2000, vol. 2, issue 2, 73-103

Abstract: We develop a model of a financially distressed firm to analyze the implications of a bank debt restructuring when the operational characteristics of the firm's project for the post-distress period are endogenously determined as part of the workout. We establish a formal link between the debt restructuring and operational actions such as employee layoffs, and show how these actions are affected by the firm's capital structure, the ordering of absolute priorities, and the allocation of control rights and residual claims after reorganization. Finally, we discuss the implications of our analysis for the design of reorganization law.

Keywords: Bank debt; financial distress; layoffs; limited liability; reorganization law (search for similar items in EconPapers)
JEL-codes: G32 G33 J21 (search for similar items in EconPapers)
Date: 2000-09-20
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