Bankruptcy Resolution: Duration, APR Violations, DIP Financing & Delaware

Abstract

This paper uses a sample of 327 firms that filed for bankruptcy over the 1993-2004 time period to examine the relationship between the duration of time a firm spends in bankruptcy and violations to the absolute priority rule. The results are consistent with both secured and unsecured creditors accepting a violation to priority of claims to obtain a faster claim resolution. Additionally, the unsecured creditors appear to receive lower recovery rates when the secured creditors were in control of the bankruptcy process. Finally, violations to the absolute priority rule are positively correlated with the presence of debtor in possession financing, but appear to have no correlation with filing jurisdictions (in particular the District of Delaware or the Southern District of New York).