Out-of-court restructuring versus formal bankruptcy in a non-interventionist bankruptcy setting

We empirically investigate debt restructurings in Germany. Our sample consists of 116 financially distressed companies from 1997 to 2004. About half of the firms succeed in restructuring their debt in a workout while the others fail and file for bankruptcy. Our evidence suggests that firms which have higher leverage, owe more debt to banks, and exhibit higher going concern values are more likely to conduct a successful workout. Bankruptcy, on the other hand, is more likely for firms with deficient lender coordination and a high fractions of collateralized debt. The analysis of stock returns over the restructuring period suggests that the market uses similar information to predict successful workouts and that shareholders are better off if bankruptcy is ultimately avoided. We find that 84% of the firms which filed for bankruptcy were finally liquidated.