Firm Debt Renegotiation, Reorganization Filing and Bank Relationships

In this paper, we investigate the determinants of the firm's decision between informal or formal debt restructuring using a sample of Taiwanese listed firms. Our main results are as follows. First, bank shareholders fare significantly better with successful debt renegotiation by borrower firms than with the filing of a reorganization petition. Second, the stock market differentiates between reorganizations filed for opportunistic purposes and those reflecting formal financial resolutions. Third, the initial choice between debt renegotiation and reorganization filing is closely associated with the firm's bank relationships. However, this varies according to the relative bargaining power of firms and their banks, with the likelihood of successful debt renegotiation increasing with the bargaining power of the distressed firm. This suggests that a debtor-friendly bankruptcy system does not necessarily enhance the efficiency of the resolution of financial distress in a financial system where banks are the dominant providers of capital.