Journal of Financial Economics Vol. 48 No. 1 1998
Information problems, conflicts of interest, and asset stripping:
Abstract
Eastern Airlines' bankruptcy illustrates the devastating effect on firm value of court-sponsored asset stripping, i.e., the use of creditors' collateral to invest in high-variance negative net present value projects. During its bankruptcy, Eastern's value dropped over 50%. A substantial portion of this value decline occurred because an overprotective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear that Eastern should have been shut down. The failure of Eastern's Chapter 11 demonstrates the importance of having a bankruptcy process that protects a distressed firm's assets, not simply from a run by creditors, but also from overly optimistic managers and misguided judges.
- DOI
- 10.1016/s0304-405x(98)00004-x
- Volume
- 48
- Issue
- 1
- Pages
- 55-97
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib