Debtor-in-possession financing

Several recent papers have documented the benefits of debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of expropriative wealth transfers. In this paper we address this issue by analyzing both stock and bond price data for a comprehensive sample of DIP loans and find significant positive abnormal stock and bond returns at the announcement of DIP loans. Also, we do not find evidence of wealth transfers from junior to senior debt-holders. Further, we examine the DIP loan process in detail and we document important institutional features of DIP loans such as maturity, covenants, fees and interest charges. We find evidence of intense monitoring using covenants. We also find higher fees and charges associated with DIP loans. We argue that overall the results are consistent with the information processing role of financial intermediaries.     

Dividend reinvestment plans: An empirical analysis

This study examines the effect of initiating discount and no discount dividend reinvestment plans on shareholder wealth. The results show a negative response to DRP announcements, which is significantly smaller than that found in studies of new equity offerings. These results are consistent with the Scholes and Wolfson (1989) hypothesis that managers in need of equity capital use DRPs to mitigate the adverse stock price effects of new equity issue announcements. Furthermore, there is a significant difference in the price response of discount and no discount DRPs for industrial firms. This result is supportive of the signaling potential of discount DRPs. Supportive evidence is also found in the analysis of firm characteristics for industrial firms.     

Electoral goals and center-state transfers: A theoretical model and empirical evidence from India

We construct a model of redistributive politics where the central government is opportunistic and uses its discretion to make transfers to state governments on the basis of political considerations. These considerations are the alignment between the incumbent parties at the central and state levels and whether a state is a swing state or not. A testable prediction from the model is that a state that is both swing and aligned with the central government is especially likely to receive higher transfers. We test this prediction using Indian data for 14 states from 1974–75 to 1996–97. We find that a state which is both aligned and swing in the last state election is estimated to receive 16% higher transfers than a state which is unaligned and non-swing.     

Why are firms unlevered?

In this paper, we examine why firms have no debt in their capital structure. We reject the hypothesis that zero-leverage policies are driven by entrenched managers attempting to avoid the disciplinary pressures of debt. These firms do not have weaker internal or external governance mechanisms. The debt initiation decisions of these firms are not preceded by shocks to their entrenchment, such as takeover threats or the emergence of activist blockholders. Our evidence supports the hypothesis that these firms are financially constrained. Zero-debt firms are small, young, conserve cash from cash-flow, and are more likely to lease their assets. When they have access to a line of credit, they face stricter covenants and higher all-in costs than comparable control firms. They lose market share in economic downturns, consistent with the financial constraints explanation, but inconsistent with theories of predation which suggest that they may be voluntarily stockpiling debt capacity.     

DETERMINANTS OF VALUATION EFFECTS FOR SECURITY OFFERINGS OF COMMERCIAL BANK HOLDING COMPANIES

In this study, the impact of security issuance by bank holding companies is examined in light of two hypotheses: the regulation or asymmetry reduction hypothesis and the bank capital hypothesis. Announcements of the issuance of common stock are associated with a significant negative effect, and the magnitude of this effect is similar to that found previously for utilities and smaller than that found for industrial firms. The market does not appear to treat subordinated debt announcements as similar to equity, although the debt qualifies as “capital” for regulatory purposes. Cross-sectional regressions do not support asymmetric information models where all unexpected external announcements are viewed negatively. Rather, the type of security being issued is an important determinant of the announcement effect.     

AN ANALYSIS OF CONTRACT COST PHASING ON ENGINEERING AND CONSTRUCTION PROJECTS

The development and implementation of engineering and construction projects for new manufacturing facilities in the oil, gas, and petrochemical industry is largely contracted out. Progress and cost control by the owner is an intrinsic part of these projects. The results of an empirical analysis of payment and progress schedules for different contract types are presented, indicating a practice of advance payments on lump sum/fixed price contracts. The Value of Work Done concept and a normalized approximation function for progress control are discussed. The results provide guidance for progress management and contract cost phasing on engineering and construction projects.     

Telemedicine and rural primary health care: an analysis of the impact of telecommunications technology.

A scarcity of health care workers attributable to the present maldistribution of physicians is one of the most pressing health care delivery problems in rural America. Expanded utilization of non-physician primary health care providers is a possible solution to this problem. The capability of satellite clinics staffed by these personnel to provide ambulatory services efficiently and effectively can be enhanced by reducing the need for physical referral of the patients to a physician at a central clinic. The use of telecommunication technologies for conducting consultation between remotely located non-physicians and physicians can potentially reduce the required number of such referrals. This paper describes the procedures used for estimating the impact of alternative telemedicine technologies on the delivery of primary care in rural areas. Non-physician protocols were used to measure the impact of technology.     

Debt Restructuring and Economic Recovery: Analysing the Argentine Swap

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a super‐majority of creditors accepted a swap that essentially involved the ‘pesification’ of dollar liabilities. With the IMF not playing its customary role in arranging a swap, we consider whether a bilateral bargaining approach can help explain the final settlement and the delay in achieving it. We find that the swap broadly corresponds to a bargaining outcome where substantial delay occurred for both political and economic reasons. Even after political legitimacy was assured by general elections, negotiators seeking a sustainable outcome – at a time of deep recession, profound currency under‐valuation and high sovereign spreads – realised it was better to wait before settling. Other factors discussed include the definition of sustainability criteria, the effect of inter‐creditor conflict and the role of third parties in promoting ‘good faith’ bargaining. We suggest that, while these issues need further investigation, there are institutional changes that could make them less problematic.     

Debtor-in-possession financing and the resolution of uncertainty in Chapter 11 reorganizations

This paper investigates the use of debtor-in-possession (DIP) financing by firms reorganizing under Chapter 11. A model is developed in which there is asymmetric information between the creditors of a distressed firm and its management. In this context, it is demonstrated that reliance on DIP financing resolves informational asymmetries regarding the true economic value of distressed firms. The model's conclusions are empirically supported in the paper and by results of extant research. The signaling role of DIP financing is evidenced both by the positive stock price reaction to DIP announcements and the fact that firms employing DIP financing have more successful reorganizations.     

Multiple Equilibria in the Citizen-Candidate Model of Representative Democracy

The Besley-Coate model of representative democracy has the problem of multiple equilibria (Besley-Coate 1997). We show that requiring the Besley-Coate political equilibria to be iteratively undominated at the voting stage refines the set of (pure strategy) political equilibrium outcomes only for those cases where at least four candidates stand for election . This note complements the results of De Sinopoli and Turrini (1999).