Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress

We construct a comprehensive data set of financially distressed firms that restructured out of court or in bankruptcy from 2000-2014, and study the effect of financial institutions’ simultaneous holdings of debt and equity on the resolution of financial distress. We find that simultaneous holdings are positively associated with the likelihood of out-of-court restructuring versus bankruptcy filing. The effect is stronger when the expected bankruptcy costs are higher. Our results hold after correcting for endogeneity issues. The evidence suggests that simultaneous holdings help mitigate the conflict of interest between debt holders and equity holders and facilitate cost-effective distress resolution.