Hedge Funds and Chapter 11 (The Journal of Finance)

April 2012

KEYWORDS: bankruptcy, Chapter 11, key-employee retention plans, debt, Institutional Investors, financial institutions, creditors, American Journal of Finance


Wei Jiang, Kai Li, and Wei Wang

  • The Journal of Finance


This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter’s loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of key employee retention plan, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims.

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