This paper provides new evidence on the roles and strategies adopted by different types of debtor-in-possession (DIP) lenders: “loan-to-loan” (LTL) lenders—prepetition secured bank lenders providing DIP financing, and “loan-to-own” (LTO) lenders—activist investors (i.e., hedge funds or private equity funds) providing DIP financing. We find that LTL is more likely in Chapter 11 firms with better operating performance, when prepetition bank lenders' stakes are at risk, or when they have prior lending relationships with the distressed borrower. In contrast, LTO is more likely in small firms or when prepetition bank lenders' loans are over-collateralized. Finally, we show that much of the governance improvement at the emergence is attributed to LTO lenders. We conclude that creditors of different institutional types adopt distinct strategies to enforce their control rights under Chapter 11 reorganization and to have contrasting effects on the governance outcomes of emerged firms.

We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of 7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median 11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.