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We study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins, or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants. This paper was accepted by Serguei Netessine, operations management. [ABSTRACT FROM AUTHOR]

The number of bankruptcy filings in the energy/petroleum sector has recently soared worldwide due to the slowdown of the Chinese economy. A more general increase occurred because of the severe economic downturn resulting from the real estate crisis, which started in 2007-2008. U.S., U.K. and E.U. law all provide for some sort of bankruptcy reorganizations but the legal details as well as the practical results vary. Voluntary reorganizations are far more common in the U.S. Given the court procedures specified by the 1978 Bankruptcy Reform Act, the ultimate decision to reorganize the business or liquidate the assets hinges on whether the bankruptcy court confirms a plan to allow the firm to continue in existence. That requires that it is deemed to be a viable entity during the proceedings. Two powerful tools of financial management can be an important help in this process. The DuPont formula sheds light on key variables that influence profitability, and the Altman Z Score Model has been used many times to forecast the coming financial distress and failure of many types of manufacturing and transportation companies. Both can also be used to plan a turnaround, as will be documented in this paper. [ABSTRACT FROM AUTHOR]

This paper investigates the optimal control problem with a non-linear capital process attributed to internal competition factors. Suppose that the company can control its capital process by paying dividend, refinancing and changing the size of business. The transaction costs generated by the control processes as well as the liquidation value at ruin are considered. We aim at seeking the optimal control strategies for maximizing the company's value. The results show that the company should expand the business scale when the current capital increases. The refinancing may only happen at the moments when, and only when, the capital is null. The dividends should be paid out according to barrier strategy if the dividend rate is unconstrained or threshold strategy if the dividend rate is bounded, respectively. [ABSTRACT FROM AUTHOR]

Joseph A. Schumpeter’s theory of economic development analyzes how growth and cycle dynamics intertwine. The process of creative destruction plays an essential role in those dynamics: embodying a cleansing effect, it has a clear, beneficial impact on long-run development. For that reason, and also for some of his famous (and provocative) non-interventionist statements, Schumpeter is generally interpreted as a pure liquidationist. This paper contests this rather simplistic view and shows that Schumpeter not only expressed much more nuanced positions as far as practical economic issues were concerned, but also that his views on economic policy were rooted in his earlier contributions before the Great Depression, attesting that Schumpeter’s view on economic policy was consistent over time. [ABSTRACT FROM PUBLISHER]

This paper examines the American post-WW1 boom and bust. It argues that the Federal Reserve's monetary easing from 1919 to 1920 created an Austrian Business Cycle (ABC), or an unsustainable credit boom. The collapse of the boom initiated the Depression of 1920-1921. The subsequent laissez faire policy promoted a swift recovery. In particular, the natural recovery began following a severe liquidation of firms, reallocation of resources, and wage cuts stimulated by fiscal and monetary contraction. Contrary to some other accounts, we find that significant recovery began before the Federal Reserve's 1921-1922 monetary easing affected the economy. We also address other criticisms of the credit-cycle interpretation. [ABSTRACT FROM AUTHOR]

The Insolvency and Bankruptcy Code of India aims at a time-bound resolution of stressed assets of corporates, providing the much-needed respite to creditors, particularly banks. Since its inception, there have been several upsides to the IBC's performance, such as instituting a creditor-friendly resolution regime and nudging debtors towards repayment. For banks, the IBC has ensured better recovery of largevalue industrial loans over the existing recovery channels. The IBC complements the RBI's Prudential Framework for resolution of stressed assets ensuring a more effective use of the framework as compared to the pre-IBC restructuring schemes. Even if liquidation is predominantly the method of resolution used till now, most of the liquidated cases are non-functional. Al though there are delays in resolution plan proceedings, it is the liquidation value of assets than the delays that influences recovery. Hence, admitting cases early under the IBC, through an appropriate incentive framework in banks, can help improve the IBC's efficacy. [ABSTRACT FROM AUTHOR]

This paper provides empirical evidence on issues related to the role of reorganizations. The results show that creditors receive a better payoff in a reorganization than in a going concern sale in liquidation bankruptcy. The study finds support for one explanation, namely that the direct costs of a reorganization are lower than the costs of liquidation bankruptcy. However, direct costs can explain only a part of the reorganization surplus, since the reorganization surplus is much higher than the difference in direct costs. [ABSTRACT FROM AUTHOR]

This paper presents a simple successive approximation approach to the characterization of optimal policies for finite horizon, semi-Markov decision processes. Optimal policies are nonstationary, for in this setting they depend on both time and state. We illustrate this approach by analyzing the optimal liquidation of an asset; we also show that several aspects of the standard, discrete-time, infinite horizon optimal policy carry over to the continuous-time, finite horizon policy. [ABSTRACT FROM AUTHOR]

This paper shows that plant and firm size in manufacturing, and especially in engineering industry, in several Western industrial countries has declined since the early 1970s. Two hypotheses explaining the decline are advanced. One is "dec-glomeration" or specialization: the divestiture of non-core businesses in order to free up scarce resources (particularly management time) to defend and nurture core business activities. The second hypothesis is that the emergence of new computer-based technology has improved the quality and productivity of small and medium scale production relative to standardized mass-production techniques which dominated previously. [ABSTRACT FROM AUTHOR]

This paper shows that a "precautionary" demand for money can be derived in models of the state of nature variety with uncertain cash requirements even if sales of assets incur no real costs and investors are risk-neutral. The randomness of asset prices results from uncertainty about the future state of the world that determines cash requirements, hence particular market responses and ultimately equilibrium prices. Positive correlation between the amount of assets to be liquidated and the liquidation price is a sufficient condition for the derivation of an interest-elastic demand for liquidity. The correlation coefficient is a "measure of illiquidity" of a perfectly marketable asset. Interesting comparative static results are also derived. [ABSTRACT FROM AUTHOR]

The traditional approach to corporate insolvency in Nigeria, which focused on liquidation and winding-up, has undergone a significant shift with the enactment of the Companies and Allied Matters Act, 2020. This legislation introduced administration as a corporate rescue mechanism with an emphasis on the preservation of distressed companies. Unlike liquidation and winding-up, administration aims to revitalise companies and enhance creditor outcomes. However, challenges such as lack of awareness, stakeholder reluctance and creditor impatience can potentially hinder its adoption. Addressing these challenges through enhanced awareness and stakeholder education can promote the efficacy of administration, thus aligning Nigeria's corporate insolvency regime with global standards. [ABSTRACT FROM AUTHOR]

We use proprietary data on intraday transactions at a futures brokerage to analyze how implied leverage influences trading performance. Across all investors, leverage is negatively related to performance, due partly to increased trading costs and partly to forced liquidations resulting from margin calls. Defining skill out‐of‐sample, we find that relative performance differentials across unskilled and skilled investors persist. Unskilled investors' leverage amplifies losses from lottery preferences and the disposition effect. Leverage stimulates liquidity provision by skilled investors, and enhances returns. Although regulatory increases in required margins decrease skilled investors' returns, they enhance overall returns, and attenuate return volatility. [ABSTRACT FROM AUTHOR]

This study examines the optimal intertemporal liquidation strategies to meet the cash requirements of large institutional investors in the presence of permanent and temporary price impacts. We construct a two-period optimal liquidation problem tailored to investors with intertemporal cash requirements, such as pension funds that need to meet periodic payment obligations. We impose viable government loans that can be deployed by state-owned investors, thereby extending the existing literature, which has focused largely on the private sector. The optimal liquidation strategies from a broader perspective can be sorted into three types: preemptive, conventional, and deferred liquidation. The use of viable large-scale loans can be attractive as a buffer in intertemporal decisions. Proper consideration of the timing and amount for liquidation of institutional investors is necessary. This study has important implications for policy makers and can inform the design of strategies for managing the liquidity needs of large institutional investors. [ABSTRACT FROM AUTHOR]

The Financing of Stabilization Policies: Evidence for the Canadian Economy. This paper examines the importance of including a government financing constraint in the derivation of monetary and fiscal policy multipliers for Canada. A fixed exchange rate model (eleven stochastic equations) is estimated, and dynamic multipliers are calculated for the period 1985-70. The results, which are explained through a series of sensitivity tests, show that only the monetary policy multipliers depend dramatically on the finance constraint. Several other changes in the model's structure are also examined. The importance of a direct liquid asset effect on consumption, and an estimated negative effect of expected inflation on investment are noted. [ABSTRACT FROM AUTHOR]

In this paper we discuss the optimal liquidation over a finite time horizon until the exit time. The drift and diffusion terms of the asset price are general functions depending on all variables including control and market regime. There is also a local nonlinear transaction cost associated to the liquidation. The model deals with both the permanent impact and the temporary impact in a regime switching framework. The problem can be solved with the dynamic programming principle. The optimal value function is the unique continuous viscosity solution to the HJB equation and can be computed with the finite difference method. [ABSTRACT FROM AUTHOR]

Purpose This paper aims to perform empirical analysis to test whether less severe agency conflict between managers and controlling shareholders may improve family firms’ corporate and stock liquidity, compared to non-family firms.Design/methodology/approach The authors use the ordinary least square and two-stage generalized method of moments regression analyses. They also use match-paired design for robustness check.Findings Focusing on Standard & Poor’s 500 firms, the authors find that family firms are more conservative by hoarding more corporate liquid assets (as measured by accounting balance sheet liquidity ratios) than their peer non-family firms to prevent underinvestment from external costly finance. These family firms also exhibit higher level of stock liquidity and lower liquidity risk as measured by effective bid–ask spread than non-family firms. The results are consistent with the motivation that organizations (i.e. family firms in this study) whose shareholders can efficiently monitor that their managers are associated with higher level of corporate liquidity and stock liquidity, and lower level of liquidity risk.Originality/value This study contributes to the literature on liquidity (both corporate liquidity and stock liquidity) and ownership structure, more broadly corporate governance. It provides insights into corporate and stock liquidity within a unique ownership context: family firms versus non-family firms. Family firms in the USA are subject to both Type I (agency problems arising from the separation of ownership and control) and Type II agency problems (agency conflict arising between majority and minority shareholders). It is an ongoing debate whether family firms suffer more or less agency problems from one type versus the other than non-family firms. The finding that family firms have higher corporate and stock liquidity is consistent with that family firms being subject to less severe agency conflict due to separation of ownership from control. [ABSTRACT FROM AUTHOR]

The article discusses the research on European soil testing standards and methods of determining the plastic limit using the cone penetrometer. The article mentions that if the double logarithmic formulation utilising a logarithmic liquidity index is assumed then an average ratio of undrained strengths between liquid and plastic limits is found. It also suggests that strain rate effects in the predicted fall-cone strengths can suggest strength ratio for the quasi-static condition.

We examine the impact of tax convexity on the optimal leverage, the optimal default barrier, and the credit spread. Contrary to previous papers, debt maturity in our setting is finite. We find that maturity plays a crucial role to fully capture the effect of tax convexity. Our results show that tax convexity has a substantial impact on the optimal default boundary when the maturity is intermediate. We argue that, in the presence of tax convexity, equityholders inject cash into the firm because they weigh the value surplus they achieve from delaying default against the loss they incur, given the absolute priority rule, when the firm fails to fully redeem the debt's principal at maturity. We also find that the longer is the maturity, the stronger is the negative impact of tax convexity on the optimal leverage. [ABSTRACT FROM AUTHOR]

Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, both to allow managers of going concerns to divest stores in efforts to enhance performance and as a means for investors to recover capital from failed ventures. Retailers sell billions of dollars of inventory annually during store liquidations. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key store liquidation decisions, including markdowns, inventory transfers, and the timing of store closings. We propose a heuristic for solving the store liquidation problem and evaluate the performance of this method. Through applications, we show that our approach could improve net recovery on cost (i.e., the profit obtained during a liquidation stated as a percentage of the cost value of liquidated inventory) by two to five percentage points in the cases we examined. Further, we discuss ways in which current practice in store liquidation differs from the decisions identified by our method, and we trace the consequences of these differences. [ABSTRACT FROM AUTHOR]

This study uses a cash flow based model to predict corporate bankruptcies in Australia. Using four cash based variables, the model produces very good out-of-sample predictive accuracy (AUC of around .85) which is better than some of the more complex multivariate models in the literature. The model also outperforms a logit model estimated on Altman Z score variables. The paper illustrates how to calculate and interpret the logit model failure probabilities on the failed Australian company Dick Smith's recent financial statements. [ABSTRACT FROM AUTHOR]

The term "carried interest" is typically used to refer to profits interests issued by investment partnerships to their manager(s). It is an ownership interest in a partnership that has no liquidation value at grant, but entitles the holder to a share in future partnership profits, if any. The term "carried interest" hails from the fact that the "carried interest" holder typically does not invest any of the holder's own capital in the partnership. Thus, the "carried interest" holder is "carried" by those who do invest capital in the partnership. Currently, the income that a "carried interest" receives is generally taxed as capital gain. Many commentators believe that income allocated by a partnership to "carried interest" holders should be taxed as compensation because the income is for the services the partner performs for the partnership. This paper will examine what the proper tax treatment of "carried interests" should be based on what is the most economically equitable, fair, and efficient method of taxation. Based on the equity and efficiency concepts, the authors suggest that a portion of all "carried interest" income should be taxed as a payment in exchange for services (i.e., as compensation)--regardless of the nature of the underlying assets inside the partnership and regardless of the nature of the business the partnership conducts. However, what qualifies as a "carried interest" and the portion of the income that should be taxed as compensation are not as easily defined. [ABSTRACT FROM AUTHOR]

Aiming at the two-echelon newsvendor problem in which the market demand of commodities is random both in normal sales period and in liquidation period, this paper studies the pricing and ordering decision of retailers by using rational expectation equilibrium under the condition of considering consumersʼ strategic behavior and rapid response mechanism. Then, the decision-making problem under retailersʼ initial order quantity commitment is discussed, as well as the effect of commitment mechanism on supply chain performance. On this basis, both the two-part pricing contract and revenue-sharing contract are introduced to achieve supply chain coordination aiming at the profit maximization under the initial order quantity commitment mechanism. The results show that the rapid response mechanism can reduce the negative impact of consumers' strategic behavior, and the initial order quantity commitment can further reduce the impact and improve the retailers' profit. Both the two-part pricing contract and revenue-sharing contract can coordinate the whole supply chain in which the two-part pricing contract can distribute profit arbitrarily between manufacturers and retailers while the revenue-sharing contract can share risks among members of the supply chain. [ABSTRACT FROM AUTHOR]

Purpose: The scientific research was aimed to identify the procedure of actions in the company which deals with the liquidation of the mines. The procedure and conclusions which are presented will be the base to ensure effectiveness and efficiency of the processes of the liquidation. Design/methodology/approach: To create a model of the process management systems in SRK S.A. three stages of research were achieved. The available literature on the management processes was analyzed and compared with personal experience of the mine liquidation. Interviews were conducted with the Branch Management of SRK S.A. The maps of the process of the liquidation were prepared and the areas and problems of the research were shown. Findings: The respondents wanted to have prepared the process flow maps, that will facilitate the conduct of current and possible future liquidation processes in terms of financial efficiency. Research limitations/implications: An analysis and solution of those problems will allow to improve the efficiency and accuracy of the conducted liquidation process. Practical implications: The process of the liquidation of the mines is complex and costly. The rationalization and the minimization of the costs is the base to ensure effectiveness and efficiency of the processes of the liquidation. Social implications: The process of the liquidation of the mining plant requires a number of interrelated economic, environmental and legal factors. A lack of indicated priorities can repeatedly led to competency, ambition and organizational conflicts. Originality/value: The article presents the maps, figures, tables and surveys which introduce the process of the liquidation of the mines. [ABSTRACT FROM AUTHOR]

I analyze efficient government interventions to mitigate financial distress during a severe macroeconomic downturn. At the macroeconomic level, the key variable is the gap between the real wage and the shadow cost of labor. This gap is large when unemployment is high. At the micro level, laissez-faire leads to excessive liquidation of businesses but an indiscriminate bailout prevents efficient reallocations and implies a large transfer from taxpayers to existing private creditors. I show that a cost-efficient intervention can be achieved with a continuation premium, whereby the government agrees to reduce its claims by the same haircut as private creditors plus a fixed premium. (JEL D24, G33, G38, H12) Received November 17, 2020; editorial decision November 23, 2020 by Editor Andrew Ellul. [ABSTRACT FROM AUTHOR]

This paper explores the lending business and internal capital markets of German banks during periods of liquidity stress and government support. The analysis yields three key findings. First, when liquidity conditions deteriorate, cross-sectional differences in balance sheet characteristics impact the responses while reflecting the respective business models and geographical focus of large as distinct from small banks. Second, large and small banks, on the whole, shift lending away from international markets to the domestic market when drawing on government support during periods of liquidity stress. These findings point to the bank-specific requirements attached to the receipt of government support. Third, government support did not prevent banks focused on the domestic market from transmitting liquidity shocks to their affiliated banks abroad. [ABSTRACT FROM AUTHOR]

The Banque de France contribution analyzes the effect of liquidity risk on domestic and foreign lending, credit and intragroup funding by French banking groups. The paper finds that a higher core deposit ratio, a higher commitment ratio, and a low ratio of illiquid assets are associated with higher growth of certain types of lending during times of liquidity risk. These effects are mitigated when public liquidity is accessed, thus confirming that public liquidity provision was conducive to maintaining lending growth. Most importantly, it finds that the quantitative importance of liquidity risk is more pronounced for foreign lending, which may suggest that the particular banking model of French banks and the strong domestic retail sector contributed to the stability of domestic credit. [ABSTRACT FROM AUTHOR]

Purpose – The purpose of this paper is to demonstrate the implications of power imbalance and over-emphasis on commercial logic on the structure and governance of Scottish football. Design/methodology/approach – An in-depth analysis of secondary sources is used to identify the logics at play in Scottish football and to explore implications of the liquidation of Rangers for the structure of the game. Findings – Over-emphasis on commercial logic has led to power being concentrated in two clubs, Celtic and Rangers, and to other clubs and the league itself becoming financially dependent on those clubs. The collapse of Rangers thus threatened the stability of other clubs and the league. The case highlights the challenge of reconciling competing logics and the role played by previously peripheral actors in bringing about change in the field. Research limitations/implications – The on-going nature of the case, related investigations and legal process meant that it was not possible to supplement the secondary source material with primary evidence. Practical implications – It demonstrates the multi-faceted nature of elite contemporary football and of the challenges faced by leagues and governing bodies in accommodating logics and multiple stakeholder interests. It also highlights the need for more effective financial regulation of corporate football clubs and their officials and emphasises the importance of inclusive stakeholder governance. Originality/value – It highlights the risks inherent in football business in small markets dominated by one or a few clubs. It highlights the role that previously peripheral actors can play in bringing about change within a field. [ABSTRACT FROM AUTHOR]

This paper examines the mechanism through which banking sector distress affects the availability of credit using the experience of the United States during the Great Depression. We utilize previously neglected data from a 1934 survey conducted by the Federal Reserve System of both banks and Chambers of Commerce regarding the availability of credit, and examine which aspects of the banking system collapse affected credit availability as indicated by the survey. We find that bank failures had the most dominant impact, but there is also some evidence for the importance of funding constraints from deposit outflows and of protracted bank liquidation. [ABSTRACT FROM AUTHOR]

Purpose – The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation value of the firm. The purpose of this paper is to examine the relations between CEO inside debt ratios and tangible assets (i.e. asset tangibility, liquidation value, and fixed asset investment). Design/methodology/approach – The authors use the Ordinary Least Square (OLS) contemporaneous and lead-lag regression analyses. They also use two-stage least-square (2SLS) regression analysis for robustness check. Findings – The findings are fourfold: first, CEO inside debt has a positive effect on asset tangibility of the firm; second, CEO inside debt has a positive effect on the liquidation value of the firm; third, CEO inside debt has a positive effect on the tangible asset investment (as measured by capital expenditures) of the firm; and fourth, these positive effects are found in both the contemporaneous year and the subsequent year and in both OLS and 2SLS frameworks. The research provides further evidence that CEOs with higher inside debt holdings exhibit safety-seeking behavior. The authors document direct proof for the theory proposed by Edmans and Liu (2011) that these CEOs, like any creditors, care a great deal of the asset tangibility and liquidation value of the firm. Originality/value – This study contributes to the existing literature by providing further empirical evidence to support that CEO inside debt holdings have impacts on firm investment decisions and capital allocations. Inside debt does help align the executive managers’ personal incentive with firms’ value, and mitigate the agency conflicts between managers and debt holders. This study provides significant empirical evidence to support the theory suggested by Edmans and Liu (2011) that CEOs with higher level of inside debt holdings do care a greater deal about the asset liquidation value of the firm, and these firms tend to invest more in tangible assets to preserve the liquidation value. [ABSTRACT FROM AUTHOR]

In this paper, the concept of liquidation (Verflüssigung) from the chapter on Self-consciousness in Hegel's Phenomenology of Spirit is reconstructed and then used to deconstruct the systematic transition from sculpture to painting in the passage on the "System of the individual arts" in G.W.F. Hegel's Aesthetics: Lectures on Fine Art. The aim is to show that such a deconstructed version of Hegel's art philosophy provides a valid conceptual framework for the analysis of modern, particularly postmodern and contemporary art, which results as liquid or liquidated art. Damien Hirst's For the Love of God is discussed as major evidence for the concomitant neo-Hegelian claim that modern art has discursive reflection as its necessary supplement. [ABSTRACT FROM AUTHOR]

This paper explores the author's clinical work with a young boy between the ages of four and eleven. The author postulates that there are, in addition to "defenses of the self" that develop in a pathological, indeed, toxic way to isolate the child by alienating others and making the child emotionally sick, healthier defenses of the self, which are described as image-producing antibodies that work to undo the toxic effects of morbid defenses. These healthy defenses of the developing self are called psychic antibodies. The author presents his hypothesis of the psychic immune system and its functioning based on his work with "Willy," using, as further empirical evidence, a brief history of Willy's birth, infancy, and early childhood, four sandplays, and seven dreams. [ABSTRACT FROM AUTHOR]

We study the optimal liquidation problem in a market model where the bid price follows a geometric pure jump process whose local characteristics are driven by an unobservable finite-state Markov chain and by the liquidation rate. This model is consistent with stylized facts of high frequency data such as the discrete nature of tick data and the clustering in the order flow. We include both temporary and permanent effects into our analysis. We use stochastic filtering to reduce the optimal liquidation problem to an equivalent optimization problem under complete information. This leads to a stochastic control problem for piecewise deterministic Markov processes (PDMPs). We carry out a detailed mathematical analysis of this problem. In particular, we derive the optimality equation for the value function, we characterize the value function as continuous viscosity solution of the associated dynamic programming equation, and we prove a novel comparison result. The paper concludes with numerical results illustrating the impact of partial information and price impact on the value function and on the optimal liquidation rate. [ABSTRACT FROM AUTHOR]

Coordination failure among owners of heterogeneous debt types increases distress costs. Covenants reduce expected distress costs by lowering the probability of liquidity shortages, increasing liquidation values, and incentivizing creditor monitoring. We predict and find that new debt contracts include more covenants when borrowers' existing debt structures are more heterogeneous. Our findings suggest that covenants are not only used to address creditor–shareholder conflicts but also to reduce the expected costs of coordination failure among creditors. Furthermore, our results indicate a dynamic component missing from static debt structure models: Debt heterogeneity entails additional covenants (i.e., constraints) when raising future debt. This paper was accepted by Lauren Cohen, finance. [ABSTRACT FROM AUTHOR]

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Explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders. In the first–best outcome, reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improved overall firm value. If control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers, most of the benefits are appropriated by borrowers ex post. Lenders can restore the first–best outcome by seizing this control or by the ex post transfer of control rights. Reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only. [ABSTRACT FROM AUTHOR]