We analyze the distressed firm’s decision between Chapter 11 and an exchange offer. We construct a comprehensive data set on the financial characteristics and capital structure of 269 distressed firms, which, unlike previous studies, uses quarterly information and includes exhaustive data on equity and bond ownership by institutional investors. Logit regressions confirm that the firm’s restructuring decision depends on its financial characteristics as well as the equity and bond ownership of institutional investors. The impact of ownership varies across categories of investors and according to whether they hold equity or bonds. In general, equity ownership favours exchange offers while we find mixed evidence for bond ownership. In particular, hedge funds have a positive impact on the likelihood of exchange offers through their equity holdings but none through their bond holdings. Finally, the magnitude of equity and bond institutional ownership depends on the quarter at which they are measured, confirming the importance of using quarterly data.

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Timothy FISHER
Associate Professor, School of Economics at the University of Sydney
Jocelyn MARTEL
Head of the ESSEC-Amundi Chair in Asset & Risk Management
Senior Lecturer in Finance, Olin