Corporate Restructuring and Business Insolvency: Economic Impact and Best Practices

Stuart C. Gilson is studying how severe financial distress impacts corporate policies and economic resource allocation. He is also studying how managers can best respond to financial distress in order to preserve and grow value. He is undertaking this research through a combination of field research and large-sample analysis. Much of his work focuses on the role of corporate bankruptcy law in the resolution of financial distress. His past research in this area has considered how management tenure and corporate governance are affected in firms that reorganize in Chapter 11. He has also studied what factors help or hinder the restructuring process and the likelihood of a successful reorganization. For example, he has shown that negotiations in Chapter 11 often break down because competing classes of claimholders come to the negotiations with widely divergent (and deliberately biased) estimates of what the firm is worth. In one ongoing project, he is studying how bankruptcy laws differ across a large sample of countries, to determine how (or whether) the characteristics of a country's bankruptcy laws affect managers' willingness to take risks. In another project, he is studying how efficiently priced are the debt and equity claims of firms in Chapter 11, in an attempt to understand how active trading in these claims (which has increased dramatically in recent years) affects the resolution of financial distress. Finally, he is studying bankrupt firms' increasing use of asset sales (through so-called "Section 363" transactions) to restructure their balance sheets (as opposed to traditional consenual reorganizations under Chapter 11 of the U.S. Bankruptcy Code).