The Administrative Costs of Debt Restructurings: Some Recent Evidence

How much does it cost to restructure a firm's debt? What factors can explain differences in restructuring costs across firms? The central thesis of the paper is that restructuring costs should be lower when there is less competition among creditors. Understanding the size and determinants of direct financial distress costs is important for two reasons. Under the "static trade-off" theories of capital structure, financial distress costs can be an important determinant of firms' optimal capital structures. Documenting the nature of financial distress costs is essential to understanding and testing these theories. Also, the debt restructuring process has been criticized for becoming increasingly inefficient and costly. Understanding the determinants of restructuring costs is necessary before policymakers can discuss ways to reduce these costs.