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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.

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 investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant-level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales, and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs. A KEY QUESTION IN CORPORATE FINANCE LITERATURE is whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms can be efficiently reorganized and the assets of unproductive firms effectively redeployed. Several studies have identified possible costs and benefits associated with Chapter 11 bankruptcy reorganizations. Of these costs, indirect or real costs represent a deadweight loss and are therefore considered most significant. 1 In this paper, we examine the importance of these costs and the effect of plant-level efficiency, firm characteristics, and industry demand on the decisions to redeploy assets or close manufacturing plants in bankruptcy. Our approach differs in two ways from previous studies. First, our empirical de-

This paper examines the default probabilities (DPs) that are generated by alternative “structural” models of risky corporate bonds. 1 We have three objectives: (i) To distinguish “exogenous default ” from “endogenous default ” models

assistance. The authors acknowledge the help of Edward Altman, Brooks Brady, and Standard and Poors for providing data employed in the paper and its documentation. The authors are grateful to the Institute for Quantitative Investment Research (INQUIRE), UK for its financial support for the project. Acharya is grateful to the Research and Materials Development (RMD) grant from London Business School. Understanding the Recovery Rates on Defaulted Securities We document empirically the determinants of the observed recovery rates on defaulted securities in the United States over the period 1982–1999. The recovery rates are measured using the prices of defaulted securities at the time of default and at the time of emergence from default or from bankruptcy. In addition to seniority and security of the defaulted securities, industry conditions at the time of default are found to be robust and important

We create a dynamic model in which a self-interested, risk-averse manager makes corporate investment decisions at a levered firm with characteristics typical of public US firms. We examine the magnitude of distortions in those decisions when a new project changes firm risk and find expected changes in the values of future tax shields and bankruptcy costs to be important factors. We evaluate the extent to which these distortions vary with firm leverage, debt duration, project size, managerial risk aversion, managerial non-firm wealth, and the structure of management compensation packages. The corporate finance literature has extensively modeled the distortions in investment decisions that result from conflicts of interest between claimholders. These models generally imply that firms make suboptimal project choices, either in terms of good projects that are rejected, or bad projects that are accepted. Since it is difficult to observe management forecasts of project net present values, especially for projects that are not ultimately undertaken, it is difficult to assess the importance of these models quantitatively. One approach to evaluating the importance of investment distortions is to first calibrate a model that uses data from public firms, and then estimate the magnitude of the distortion in investment decisions by examining the characteristics of the projects that the model predicts would be accepted or rejected. Studies such as those by Mello and Parsons (1992), Leland

Multiple activities may be separated financially, allowing each to optimize its financial structure, or combined in a firm with a single optimal financial structure. We consider activities with nonsynergistic operational cash flows, and examine the purely financial benefits of separation versus merger. The magnitude of financial synergies depends upon tax rates, default costs, relative size, and the riskiness and correlation of cash flows. Contrary to accepted wisdom, financial synergies from mergers can be negative if firms have quite different risks or default costs. The results provide a rationale for structured finance techniques such as asset securitization and project finance. DECISIONS THAT ALTER THE SCOPE of the firm are among the most important faced by management, and among the most studied by academics. Mergers and spinoffs are classic examples of such decisions. More recently, structured finance has seen explosive growth: Asset securitization exceeded $6.8 trillion in 2004, and Esty and Christov (2002) report that in 2001, more than half of capital investments with costs exceeding $500 million were financed on a separate project basis. 1 Yetfinancial theory has made little headway in explaining structured finance. Positive or negative operational synergies are often cited as a prime motivation for decisions that change the scope of the firm. A rich literature addresses the roles of economies of scope and scale, market power, incomplete contracting, property rights, and agency costs in determining the optimal boundaries of the firm. 2 But operational synergies are difficult to identify in the case of asset securitization and structured finance.

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There are situations in which dispersed creditors (e.g., public creditors) have more difficulties and higher costs when collecting their claims in financial distress than concentrated creditors (e.g., banks). Under this assumption, our model predicts that measures of debt concentration relate [a] positively to creditors ’ chosen aggregate debt collection expenditures; [b] positively to management’s chosen expenditures to avoid paying; [c] positively to total net litigation costs/waste in financial distress; and [d] positively to accomplished claim recovery by creditors (to which we present some preliminary favorable empirical evidence). Under additional assumptions, measures of debt concentration relate [e] positively to intrinsic firm quality; [f] positively to creditor monitoring and negatively to managerial waste; [g] positively to optimal continuation/discontinuation choices; [h] negatively to issuing marketing expenses. In a signaling model, when concentration alone is not a sufficient signal, firms choose the ultimately concentrated debt (i.e., a house bank) and have to pay a high interest.