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Article

Resolution of Corporate Financial Distress: An Empirical Analysis of Processes and Outcomes

Michael Jacobs, Ahmet K. Karagozoglu and Dina Naples Layish
The Journal of Portfolio Management Winter 2012, 38 (2) 117-135; DOI: https://doi.org/10.3905/jpm.2012.38.2.117
Michael Jacobs Jr.
is a senior financial economist in Credit Risk Modeling in the Risk Analysis Division of the Office of the Comptroller of the Currency in Washington, DC.
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  • For correspondence: michael.jacobs@occ.treas.gov
Ahmet K. Karagozoglu
is an associate professor of finance in the Zarb School of Business at Hofstra University in Hempstead, NY.
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  • For correspondence: finakk@hofstra.edu
Dina Naples Layish
is a visiting assistant professor of finance in the School of Management in Binghamton University in Binghamton, NY.
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  • For correspondence: dlayish@binghamton.edu
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Abstract

In this article, Jacobs,Karagozoglu, and Naples Layish focus on determining which types of firms are able to successfully remain independent entities through the resolution of their financial distress. The authors empirically investigate the determinants of the process utilized to resolve financial distress (private work-out versus public bankruptcy filing) and also the outcome (liquidation versus reorganization).After developing various qualitative-dependent variable models, they estimate and compare several accounting and economic variables measured at the time of default that they expect can influence the resolution process and outcome.Results reveal the ordered logistic regression specification achieves the best balance between in-sample fit, consistency with financial theory, and out-of-sample classification accuracy, as compared to more elaborate techniques, such as local regression or neural networks.The authors find the public resolution process to be associated with larger firms that have less tangibility, a greater proportion of secured debt in their capital structures, or higher risk measures. The private resolution process is likelier for firms that have more total leverage, greater measures of liquidity, a higher proportion of subordinated debt in their capital structures, or reside in a debtorfriendly bankruptcy court district.Regarding the resolution outcome, the authors find that firms that are more likely to be liquidated than reorganized have greater liquidity, more secured debt, lower cumulative abnormal returns on equity, higher loss given default, a less favorable auditor's opinion, or they will default in a better part of the credit cycle. Finally, firms more likely to be reorganized have greater leverage,more intangible assets, or a prepackaged bankruptcy. They conclude that their model is useful for risk managers and investors who are in the market for distressed or defaulted debt.

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The Journal of Portfolio Management: 38 (2)
The Journal of Portfolio Management
Vol. 38, Issue 2
Winter 2012
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Resolution of Corporate Financial Distress: An Empirical Analysis of Processes and Outcomes
Michael Jacobs, Ahmet K. Karagozoglu, Dina Naples Layish
The Journal of Portfolio Management Jan 2012, 38 (2) 117-135; DOI: 10.3905/jpm.2012.38.2.117

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Resolution of Corporate Financial Distress: An Empirical Analysis of Processes and Outcomes
Michael Jacobs, Ahmet K. Karagozoglu, Dina Naples Layish
The Journal of Portfolio Management Jan 2012, 38 (2) 117-135; DOI: 10.3905/jpm.2012.38.2.117
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  • Article
    • Abstract
    • TESTABLE HYPOTHESES AND REVIEW OF THE LITERATURE
    • ECONOMETRIC MODELS AND MEASUREMENT OF MODEL PERFORMANCE
    • EMPIRICAL MODELING
    • MEASURING MODEL PERFORMANCE
    • SUMMARY STATISTICS AND UNIVARIATE STATISTICAL ANALYSIS
    • EMPIRICAL RESULTS BASED ON MULTIVARIATE MODELS
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