The Influence of Managerial Incentives and a Firm's Multinationality on Corporate Reorganization

This study investigates the influence of two factors - managerial incentives and multinationality - on financially distressed firms' choice between the two options in debt resolution: file for Chapter 11 or seek private workout solutions. Prior literature examines the influence of creditors' holdout problems in distressed firms' choice of debt resolution. However, the previous studies have not examined other important factors related to a firm's choice of a debt restructuring method, namely, managerial incentives and multinationality. By using samples of 124 voluntary Chapter 11 firms and 98 private workout firms in the period of 1993 through 2003, this study shows that managers do affect the incidence of Chapter 11 filing when there is a conflict between equityholders and creditors and that distressed firms are more likely to restructure their debt privately with creditors when there is an increased level of multinationality. Consistent with prior literature, this study confirms that the choice of resolution methods depends on the extent of creditors' holdout problems and the level of a firm's economic distress.