Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

Franks, Julian and Sussman, Oren (2005) Financial Distress and Bank Restructuring of Small to Medium Size UK Companies. Review of Finance, 9 (1). pp. 65-96.

Abstract

We use a unique data set to study how U.K. banks deal with financially distressed small and medium-sized companies under a ‘contractualist’ bankruptcy system. Unlike in the U.S., these procedures limit the discretion of courts to strict enforcement of debt contracts, without any dilution of creditors’ claims. We show that lenders and borrowers select a debt structure that avoids some of the market failures often attributed to a contractualist system. Collateral and liquidation rights are highly concentrated in the hands of the main bank, giving it a dominant position in restructuring or liquidating a defaulting firm. There is little litigation, and no evidence of co-ordination failures or creditors’ runs. However, there is some evidence that the bank’s dominance makes it ‘lazy’ in monitoring, relying heavily on the value of its collateral in timing the bankruptcy decision.

Item Type: Article
Keywords: Bankruptcy; United Kingdom; Liquidation; Small Businesses
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 18 Feb 2012 20:55
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2944

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