By Wei Jiang,  Kai Li and and Wei Wang

Abstract

 This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and the secured creditors. Their effect on the debtor is manifested in higher probabilities of the latter’s loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of KERP; while their effect on the secured creditors is manifested through higher probabilities of emergence and payoffs to junior claims.

This article is Forthcoming in the Journal of Finance.