I develop and estimate a model of cash auction bankruptcy using data on 205 Swedish firms. The results challenge arguments that cash auctions, as compared to reorganizations, are immune to conflicts of interest between claimholders but lead to inefficient liquidations. I show that a sale of the assets back to incumbent management is a common bankruptcy outcome. Sale-backs are more likely when they favor the bank at the expense of other creditors. On the other hand, inefficient liquidations are frequently avoided through sale-backs when markets are illiquid, that is, when industry indebtedness is high and the firm has few nonspecific assets.

This paper provides some "rst, large-sample evidence on the Swedish auction bankruptcy system. Compared to U.S. Chapter 11 cases, the small-"rm bankruptcy auctions examined here are substantially quicker, have lower costs, and avoid deviations from absolute priority. Three-quarters of the "rms are auctioned as going concerns, which is similar to Chapter 11 survival rates. Moreover, based on market values, creditors in going-concern auctions recover a similar fraction of face value as creditors of much larger "rms in Chapter 11 reorganizations. The evidence presented here suggests that the auction bankruptcy system is a surprisingly e$cient restructuring mechanism for small

Using a unique dataset of East Asian non-financial companies, this paper examines a firm's choice between local currency, foreign currency, and synthetic local currency (hedged foreign currency) debt. We also exploit the Asian financial crisis of 1997 as a natural experiment to investigate the role of debt type in financial and operating performance. We find evidence of unique, as well as common, factors that determine each debt type's use thus indicating the importance of examining debt at a disaggregated level. Specifically, the use of natural local currency debt is associated primarily with factors found by many other studies to determine total debt levels such as size, profitability, and the market-to-book ratio. Foreign currency debt is used as a complement to local currency debt by firms with substantial capital needs seeking to lower the cost or extend the maturity structure of debt. However, the use of foreign currency debt is also determined by asset and income type consistent with agency cost and financial risk management theories. The use of synthetic local debt is primarily determined by risk management concerns. Finally, contrary to anecdotal reports and existing theory, we find no evidence that unhedged foreign currency debt is associated with significantly worse performance during the Asian crisis. Surprisingly, the use of synthetic local currency debt is associated with the biggest drop in market value, possibly due to currency derivative market illiquidity during the crisis.

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk-adjusted default probabilities derived from corporate bond spreads. For a BBB-rated firm, our benchmark calculations show that the risk-adjusted NPV of distress is 4.5 % of pre-distress firm value. In contrast, a valuation that ignores risk premia produces an NPV of 1.4%. We show that risk-adjusted, marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000). Thus, distress risk premia can help explain why firms appear to use debt conservatively.

This paper has benefitted from the comments of participants and discussants in seminars at the

JEL Classification: G32 © 2001 SUERF, Vienna

We would like to thank Warren Tease for comments and Denzil Fiebig for technical guidance. The views expressed herein are those of the authors and do not Widespread increases in corporate leverage occurred over the 1980s in Australia. There was also considerable variation in leverage across firms. This paper uses a sample of 209 firms, observed annually between 1973 and 1991, to explore both cross-sectional and time variation in financial structure. The paper begins with a survey of the literature on corporate financial structure. This leads to a model that incorporates the major determinants of leverage. The empirical model takes into account the influence of both firm-specific and time-specific effects. The dynamics of leverage are also tentatively explored. The results suggest that a number of firm-related factors influence the relative costs of debt, the level of demand for and the availability of funds. Most important among these are firm size, growth, collateral and cash flow. A number of macro-economic variables are also found to influence leverage. Most important among these are real asset prices which play a

This paper investigates the interaction between creditor structure and reorganization law. Private debt offers the advantage of flexible renegotiation out-of-court. Due to incomplete information and hold-out incentives, out-of-court renegotiation will typically fail for dispersed public debt. Introduction of Chapter 11-style renegotiation will benefit public debt firms and be harmful for private debt firms. Moreover, Chapter 11 reduces the role of private debt in corporate borrowing, in accordance with the US experience. The overall efficiency of a reorganization law is therefore ambiguous. Three prominent

Abstract: We discuss three methodological issues concerning forecasts of the outcome of financial distress that are of importance for creditors to distressed firms. First, we argue that rather than using a binary model the outcome of financial distress should be modeled using a multinomial specification that distinguishes between failure, survival as going concern, and acquisition. We also argue for a random rather than matched-pair sampling technique to better reflect decision making reality. Finally, we investigate the value of using industry-mean adjusted regressors. We find that the binary bankruptcy model is mis-specified relative to the multinomial model, that the matched sampling technique overstates model accuracy and that industry specific intercepts have better explanatory power than industry-adjusted regressors.

The topic of bankruptcy is of current interest for two reasons. First, in June 1992, for the first time since 1949, Parliament passed legislation substantially reforming the bankruptcy