Debtor-in-possession Financing and Bankruptcy Resolution: Empirical Evidence

by Sandeep Dahiya of Georgetown University,
Kose John of New York University,
Manju Puric of Stanford University, and
Gabriel Ramírez of Kennesaw State University

July 2003

Abstract: Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorganization and reduce time in bankruptcy. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from Chapter 11 than non-DIP financed firms. DIP financed firms have a shorter reorganization period; they are quicker to emerge and also quicker to liquidate. The reorganization period is even shorter when prior lenders provide the DIP financing.

JEL Classification: G33, G20.

Keywords: Chapter 11, Bankruptcy, Debtor-in-possession financing.

Published in: Journal of Financial Economics, Vol. 69, No. 1, (July 2003), pp. 259-280.

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