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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

and the Effect of Executive Pension

on the Choice between the Chapter 11 Reorganization and a Workout

Byungjin Kwak

Kyoungwon Mo

College of Business Korea Advanced Institute of Science and Technology (KAIST)

Seoul, Korea

May 2014

*This is a preliminary draft. Please do not cite this paper without authors’ permission.

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

and the Effect of Executive Pension

on the Choice between the Chapter 11 Reorganization and a Workout

Abstract:

Using a sample of 252 financially distressed firms either filing for the Chapter 11

reorganization or conducting an out-of-court debt restructuring workout, we examine the

effect of executive pension on the choice between the Chapter 11 reorganization and a

workout, particularly considering the Bankruptcy Abuse Prevention and Consumer Protection

Act of 2005 (‘BAPCPA’). We find that the firms with executive pension plans are more likely

to choose the Chapter 11 reorganization than workouts before the implement of the BAPCPA

but the preference has been reversed from the Chapter 11 reorganization to workouts since

the implement of the BAPCPA.

Keywords: executive pension; inside debt; Bankruptcy Act; workout; Chapter11.

JEL Classifications: G32, G33, M40, M41

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I. Introduction

A financially distressed firm who needs to restructure their debt can choose either the

formal Chapter 11 reorganization or an informal workout. Although both alternatives aim to

revive a bankrupt firm by restructuring its debt, they proceed differently. The formal Chapter

11 reorganization proceeds with bankrupt courts’ powerful arbitration while an informal

workout proceeds without resorting to a full judicial intervention. Therefore, a workout has a

superior flexibility and velocity in dealing with the debtor’s financial difficulties. As

restructuring costs such as administrative and legal expenses generally increase with the

length of procedure time, a workout usually requires smaller restructuring costs than the

formal Chapter 11 reorganization (Jensen 1989; Gilson, John, and Lang 1990). Due to the

lower restructuring costs of a workout, prior theory papers suggest that a firm required to

restructure its debts should choose a workout rather than the Chapter 11 reorganization

(Coase 1960; Mooradian 1994). Nevertheless, in practice, many firms choose the Chapter 11

reorganization instead of a workout. Why do the firms choose the costly Chapter 11

reorganization? Prior literature finds the reasons from ‘outside’ creditors (Roe 1987; Coffee

and Klein 1991; Gertner and Scharfstein 1991; Schartz 1993; Chatterjee, Dhillon, and

Ramirez 1995). That is, since creditors with different interests often hold out for more

favorable terms on the contract during the workout process (so-called as ‘hold-out problem’)

and it often jeopardizes the whole workout process, firms with various outside creditors

prefer the formal Chapter 11 reorganization to a workout to avoid such creditors’ harassment.

Overall, the cost disadvantage of the Chapter 11 reorganization over a workout is offset by

the costs of the hold-out problem.

Unlike the previous papers focusing on the outside debt holders, we turn our attention to

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insiders who have executive pension or deferred compensation plans (so called ‘inside debt

holders’) to investigate the determinants of the choice between the Chapter 11 reorganization

and a workout. We believe that the inside debt affects the choice between the Chapter 11

reorganization and a workout since the value of executive pension or deferred compensation

plans depends severely on the choice of the debt restructuring.

The executive pension or deferred compensation plans are common and sizable in

practice.1 It generally represents unfunded and unsecured debt claims against the firm in

bankruptcy and accordingly, the beneficiaries of executive pension or deferred compensation

plan should stand in the line with other unsecured creditors in bankruptcy. Based on the

unique natures of executive pension or deferred compensation plans, many expect that the

executive pension or deferred compensation plans align managers’ interests with those of

(unsecured) debt holders, which makes them as ‘inside debt’ (Bebchuk and Jackson 2005;

Sundaram and Yermack 2007; Wei and Yermack 2011; Cassell, Huang, Sanchez, and Stuart

2012). Empirical evidence generally supports the expectation. The prior literature finds that

managers with inside debt run their firm conservatively to reduce default risk of debt.

However, other scholars and practitioners still cast doubts on the nature of the executive

pension or deferred compensation plan (Bebchuk and Fried 2005; Bebchuk and Jackson 2005;

Alces and Galle 2012). With the interviews with lawyers and consultants, Bebchuk and

1 As also discussed in the following section of literature review, here we want to provide Bebchuk and Jackson (2005)’s three anecdotal examples showing that the amounts of executive pension are very sizable. In their first example of Pfzer, the estimated actuarial value of Dr. McKinnell (Pfzer’s CEO since 2001)’s pension plan is approximately $83 million which is greater than his total estimated compensation ($67 million) at the time of their writing. Second, they find that Dr. McGuiire (UnitedHealth Group’s CEO since 1999) has pension plan whose value is approximately $45 million and the amounts far exceed his total compensation ($10 million). Third, they estimated Archibald (Black and Decker’s CEO)’s present value of pension plan at almost $40 million which takes about 0.65% of the total equity value of the firm. The great amount is even surprising considering despite he has served as a CEO for only three years.

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Jackson (2005) argue that many firms filing for the Chapter 11 reorganization practically treat

executive pension or deferred compensation as administrative expense which has top priority

in the Chapter 11 reorganization. Especially, before the amendment on the Bankruptcy law in

2005, the section 503 of the (pre-amended) Bankruptcy law allowed debtors to confer

administrative expense status on the “actual, necessary costs and expenses of preserving the

estate, include wages, salaries, or commissions for services rendered after the commencement

of the case”. Utilizing the section 503, debtors could often obtain the bankruptcy courts’

approval on the payment of executive pension or deferred compensation plan, with the

argument that executive pension or deferred compensation plans are required to retain their

managements essential to facilitate the firms’ reorganization (Shearman & Sterling LLP’s

reports of 2005). On the other hand, in a workout, the value of executive pension or deferred

compensation plans is determined through the negotiation with creditors, which may reduce

managers’ bargaining power as well as their executive pension or deferred compensation

plans. Therefore, we hypothesize that firms with executive pension or deferred compensation

plans would prefer the formal Chapter 11 bankruptcy reorganization to a workout before the

amendment of the Bankruptcy law.

However, the situation has dramatically changed since the implementation of the

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereafter shortly,

‘BAPCPA’ or ‘the Act’). It was one of the most comprehensive amendments to the federal

Bankruptcy Law, implemented on October 17, 2005. The Act mainly aims to strengthen the

creditors’ rights in their customers’ bankruptcies. The Act significantly impacts on the

business bodies as well as individuals by increasing the creditors’ influence on the

reorganization process under the Chapter 11. Particularly, the Act severely restricts the

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retention and severance payments for insiders by amending the section 503 to impose a

higher standard for the approval of conferring administrative expense status on the payments

for the retention and severance. Cornell, Hagen, Jesner, and Eschbach-Hall (2010) argue that

the BAPCAP makes it hard for debtors to justify the payment of executive pension or

deferred compensation in the bankruptcy courts although the benefits of executive pension

plan was typically assumed before the implement of the BAPCPA. Therefore, we hypothesize

that the BAPCPA would have dramatically reversed the preference of the firms with

executive pension or deferred compensation plan from the Chapter 11 reorganization to

workouts since the implementation of the Act.

Controlling the characteristics of firms and outside creditors known to affect the choice

between the Chapter 11 reorganization and workouts, we perform various tests to examine

our hypothesis. Our results show that financially distressed firms with executive pension or

deferred compensation plans are more likely to choose the Chapter 11 reorganization than

workouts before the implement of the BAPCPA but the preference has been reversed from the

Chapter 11 reorganization to workouts since the implement of the BAPCPA. Additionally, to

alleviate the endogeneity problem, we match firms having executive pension or deferred

compensation plans with those not having the plans by using the propensity-score matching

approach. The endogeneity problems can arise when a (omitted) variable inducing a firm to

provide executive pension or deferred compensation plans to its executives simultaneously

forces the firm to choose a certain way of debt restructuring. The results with the matched

sample remain qualitatively same. Also, we examine whether the preference to a certain way

of debt restructuring is stronger for the firms with Chief Executive Officers (‘CEOs’) leaving

their firms within three years after debt restructuring. Since CEOs will not receive their

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pension plan after they leave their firm under the BAPCPA, we expect that the firms with the

CEOs planning to leave their firm soon are more likely to choose a workout, especially after

the implement of the BAPCPA in 2005. The results are generally consistent with our

expectations.

This paper has several contributions to the literature as follows. First, this paper shows a

new factor affecting the choice between the Chapter 11 reorganization and a workout. Prior

literature mostly focuses on the characteristics of outside debts to find the reason why a firm

needing to debt restructuring chooses the costly Chapter 11 reorganization instead of a

workout. Turning our attention to inside debt from outside debt, we find that the inside debt is

also an important factor on the choice between the Chapter 11 reorganization and a workout.

Second, this paper gives additional evidence supporting that the payments of executive

pensions or deferred compensations are typically treated as administrative expenses under the

Chapter 11 reorganization, particularly before the implement of the BAPCPA. Despite the

arguments that the debt claims for executive pension or deferred compensation plan are

practically paid with top priority in the Chapter 11, many studies on inside debt undoubtedly

assume that executive pension or deferred pensions are unsecured debt claims in the Chapter

11 reorganization. We provide evidence that the traditional payments for executive pension or

deferred compensation plans under the Chapter 11 reorganization has disappeared and they

have been more likely treated as unsecured debt claims since the implement of the BAPCPA.

Third, this paper shows the implications of the BAPCPA of 2005. We find that the preference

to the Chapter 11 reorganization has been reversed since the implement of the BAPCPA. The

dramatic change implies that the Act effectively restricts the payments of executive pension

or deferred compensation plans under the Chapter 11 reorganization as it initially aimed for.

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The rest of this study is organized as follows. Section 2 reviews literature and develops

our hypotheses. Section 3 describes sample and research design. Section 4 provides the

descriptive statistics and empirical results. Section 5 presents additional issues and sensitivity

tests, followed by conclusion in Section 6.

II. Literature review and hypothesis development

The choice between the Chapter 11 reorganization and a workout

A financially distressed firm that needs to restructure its debt has two choices: It can

either file for the Chapter 11 reorganization or conduct a workout. The Chapter 11

reorganization proceeds with bankrupt court’s powerful arbitration. Once a bankrupt firm

files for the Chapter 11 reorganization either voluntarily or involuntarily, the court imposes

‘automatic stay’ to prevent creditors from collecting on their debt or foreclosing on their

collateral until the firm leaves bankruptcy. Then, the bankrupt court orders the initiation of

the Chapter 11 reorganization if (1) the filing firm is generally and continuously unable to

pay its matured debts because of the inability to pay or (2) its debts exceed its asset. Since the

court initiates the Chapter 11 reorganization, the filing firms should propose reorganization

plan within the initial 120 days. All of debts are discharged except for those debts to be

partially or fully paid on the reorganization plan. If debtors’ proposed reorganization plan is

not accepted by creditors within 60 additional days after the initial 120 days, creditors can

propose their own reorganization plan. The reorganization plan is accepted if majority

creditors (two-third-in value and one-half in number) approve the proposed plan through the

affirmative vote. However, when the reorganization plan is not approved by the creditors’

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vote, bankrupt court can impose the plan to break the deadlocks. After the bankrupt court

confirms the accepted reorganization plan, the filing firm initiates the performance of

reorganization plan under the bankrupt courts’ severe monitoring and intervention. On the

other hand, workout procedures are disconnected from any kind of judiciary intervention.

Once a bankrupt firm informs creditors of its intention to perform a workout, creditors’

committee commences a workout when it is better than litigation. Without stay period, the

workout firm privately negotiates with its creditors in preparing their reorganization plan.

After committee unanimously agrees with the reorganization plan, the reorganization plan

initiates under the creditors’ monitoring.

Even though the choice between the Chapter 11 reorganization and a workout can be

determined by either shareholders, board of directors or creditors, in practice, board of

directors mostly makes the decision. In the choice, whoever the decision makers are, they

should make an economically efficient choice between the Chapter 11 reorganization and a

workout to minimize the restructuring costs since the restructuring costs are often severe

burdens to the financially distressed firms.

Prior literature has traditionally classified the costs of restructuring into direct and

indirect costs. Direct costs are out-of-pocket administrative costs such as legal and

investment banking services, increasing with the length of the restructuring time. Indirect

costs are all other costs besides direct costs. A typical example of indirect costs is managers’

extra spending time for restructuring. Managers’ incentive distortion is another example of

indirect cost. For example, managers of restructuring firms may forgo positive net present

value projects to increase cash holdings in response to the demand of creditors or bankruptcy

courts.

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Prior studies have tried to compare the relative restructuring costs between the Chapter

11 reorganization and a workout (Jensen 1989; Gilson et al. 1990). They generally conclude

that both direct and indirect costs are all higher for the Chapter 11 reorganization than a

workout. The direct costs are higher for the Chapter 11 reorganization than a workout because

the Chapter 11 reorganization demands more complicated procedures and legal works, which

resulted in longer procedure time for the Chapter 11 reorganization than a workout. Moreover,

the procedure time for the Chapter 11 reorganization often become prolonged because of

bankruptcy lawyers who want to delay the time in order to obtain more fees guaranteed with

top priority under the Chapter 11 (Gilson et al. 1990). The indirect costs are also higher for

the Chapter 11 reorganization than a workout. The longer the time of the Chapter 11

reorganization lasts, the longer managers spend time to handle the restructuring procedures.

In addition, the Chapter 11 reorganization distorts managers’ incentives more severely than a

workout. For example, as supported by Frank and Torous (1994) who find that cash is used

more extensively to redeem creditors’ claims in the Chapter 11 than in a workout, managers

under the Chapter 11 reorganization may forego profitable investment opportunities more

often than those managers in a workout to satisfy the creditors’ or bankruptcy courts’ demand

for more cash holdings.

Due to the high costs related to the Chapter 11 reorganization, some theory papers

suggest that financially distressed firms should choose a workout over the Chapter 11

reorganization to restructure their debt. For example, Coase (1960) argues that firms and their

creditors should choose a workout rather than the Chapter 11 reorganization to restructure

their debt since the Chapter 11 reorganization is much costly. Mooradian (1994) also models

the choice between the Chapter 11 reorganization and a workout. He suggests that filing for

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the Chapter 11 reorganization is generally not an efficient solution for the financially

distressed firms. Hotchkiss (1995) provides empirical evidence supporting the theoretical

views. She finds that firms filing for the Chapter 11 reorganization continue to perform

poorly than those conducting a workout, due to the higher restructuring costs of the Chapter

11 reorganization.

However, despite the theoretical expectations and empirical evidence, many firms

actually choose the formal Chapter 11 reorganization. Then, why do the firms choose the

costly Chapter 11 instead of a workout? The literature suggests hold-out problem as for the

reason (Roe 1987; Coffee and Klein 1991; Gertner and Scharfstein 1991; Schartz 1993;

Chatterjee et al. 1995). The hold-out problem arises when creditors have incentives to hold

out for more favorable treatments during the negotiation of a workout. Therefore, the ‘hold-

out problem’ becomes severe depending on the voting rules for determining acceptance of the

plan, the number of creditors who participate in the plan, and the type of debt that is

restructured (Coffee and Klein 1991; Gertner and Scharfstein 1991, Roee 1987, Schartz 1993;

Chatterjee et al.1995). For example, Gilson et al. (1990) find firms with less bank loan, more

lenders, and less intangible assets are more likely to file for the Chapter 11 reorganization.

Asquith, Gertner, and Scharfstein (1994) find that firms with more secured and collateralized

debt prefer the Chapter 11 reorganization to a workout. With German sample, Jostarndt and

Sautner (2010) find that firms with lower leverage, owe more debt to public, and exhibit

lower going concern values are more likely to choose the Chapter 11 reorganization. On the

other hand, the Chapter 11 reorganization allows the filing firms to continue their operations

without such creditors’ harassment under the workout since it proceeds with the bankruptcy

courts’ powerful arbitration (Gertner and Scharfstein 1991). Overall, despite of the relatively

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higher costs of the Chapter 11 reorganization than a workout, firms file for the Chapter 11

reorganization to avoid the hold-out problem in workouts when they have several creditors

with different interests.

However, as seen in the above reviews, prior studies mostly have focused on outside

creditors on the choice between the Chapter 11 reorganization and a workout. No study

examines the effect of inside creditors on the choice between the Chapter 11 reorganization

and a workout. We believe that it is important to consider inside creditors since they are the

decision makers on the choice between the Chapter 11 reorganization and a workout. In

addition, it is worth mentioning that the cost from the insider creditors’ inefficient choice will

eventually turn to the outside creditors. Therefore, we examine the effect of inside creditors

on the choice between the Chapter 11 reorganization and a workout.

In the following section, we will discuss the definition of inside debt and what natures of

inside debt distort executives’ incentives to keep the values from the choice between the

Chapter 11 organization and a workout.

Executive pension

Many firms provide sizable executive pension or deferred compensation plans, which are

also called as ‘Supplementary Key Employee Retirement Plan’ (SKERP)2. Bebchuk and

Jackson (2005) report that in their sample of Standard and Poor’s (S&P) 500 firms, the

CEOs’ pension plans have a median actuarial value of $15 million and the ratio of the CEOs’

pension value to the total compensation had a median value of 34%. Sundaram and Yermack

2 Executive pension or deferred compensation plans are also called as Key Employee Retirement Plan (KERP) or Supplementary Employee Retirement Plan (SERP) or many different names given by the firms.

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(2007) who also study the pension arrangement of the CEOs of S&P 500 find that 78% of

their sample firms provide executive pension plan to their CEOs. They also find that CEOs’

pension plan takes about 17% of their total equity value and the annual increase of CEOs’

pension value takes about 10% of the CEOs’ total compensation and the portion increase as

CEOs become older.

Executive pension has unique natures that other forms of executive compensation do not

have. It is unsecured and unfunded debt claims against the firm and accordingly, the

beneficiaries of the claims should stand in the line with other unsecured debt holders in the

formal bankruptcy. These natures imply that, like other unsecured debt holders, executives

under the pension plan can hardly recover their debt claims from bankruptcy. Frisby (2007)

reports that more than 90% of unsecured creditors in United Kingdoms did not recover any of

their debt claims in the post-Enterprise Act procedures in 2002. Gilson and Vetsuypens (1993)

find that 14 firms of their total 77 publicly traded firms that either filed for the Chapter 11

reorganization or privately restructure their debt terminate pension plan or cap pension plan

benefits.

The unique natures of executive pension or deferred compensation attract many scholars

to regard them as a form of ‘inside debt’ (the term, ‘inside debt’ was named by Jensen and

Meckling in 1976). Believing the unsecured debt status of executive pension or deferred

compensation plan in bankruptcy, the studies examine whether the inside debt aligns

managers’ incentives with outside debt holders and how the inside debt distort managers’

incentive in their decisions. They generally conclude that CEOs with the inside debt manage

their firm conservatively to reduce default risk of debt, aligning the CEOs’ interests with

those of (unsecured) debt holders. For example, Sundaram and Yermack (2007) find that

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CEOs with high executive pension value manage their firms conservatively as evidenced by

longer “distance-to-default’’. Cassell et al. (2012) find a negative association between the

CEOs’ inside debt holdings and the volatility of future firm stock returns, research and

development (R&D) expenses, and financial leverage and a positive association between the

CEOs’ inside debt holdings and the extent of diversification and asset liquidity. Further, the

studies find that investors are aware of the impact of the inside debt on the managers’

behavior. Wei and Yermack (2011) find that bond prices rise, equity prices fall, and the

volatility of both securities drops for the firms initially reporting that their CEOs have sizable

defined benefit pensions or deferred compensation plans. Anantharaman, Fang, and Gong

(2013) examine whether private debt lenders are aware of the debt-like compensation in the

debt contracts with the firm. They find that the actuarial amount of executive pension are

negatively associated with promised yield and covenant usage. Particularly, Edmans and Liu

(2011) model the impact of inside debt on the managers’ effort in financially distressed firms.

They find that inside debt is a superior solution to increase managers’ effort and mitigate

agency costs of debt than the solvency-contingent bonuses and salaries because its payoff

depends not only on the incidence of bankruptcy but also firm value in bankruptcy.

However, several scholars and practitioners still cast doubt on the argument that

executive pensions or deferred compensations are worked as an inside debt. They insist that

executive pension or deferred compensations cannot induce debt-like incentive to managers

because those pensions are traditionally paid during the process of the formal Chapter 11

reorganization. According to the Bebchuk and Jackson (2005)’ interview with a

compensation-specified lawyer, firms going through the Chapter 11 reorganization often

assume executive pension obligations in full even when other creditors’ claims are left unpaid.

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In addition, Bebchuk and Fried (2005) find that firms often use outside insurance companies

to guarantee executive pensions in the event of looming insolvency. Especially before the

implement of the BAPCPA, firms could treat (unvested) executive pension or deferred

compensation as administrative expenses under the section 503 of the (pre-amended)

Bankruptcy law, which confers administrative expense status on the “actual, necessary costs

and expenses of preserving the estate, including wages, salaries, or commissions for services

rendered after the commencement of the case”. Shearman & Sterling LLP (2005) reports that

the payment of executive pension plans and severance were commonly allowed under the

Chapter 11 reorganization before 2005, based on the section 503.3 Meanwhile, executive

pension or deferred compensation plans are still negotiable under workout process.

Considering creditors often demand for reducing managements’ compensation (Gilson and

Vetsuypens 1993), it would not easy for management to keep their pension value as like in

the Chapter 11 reorganization. Even worse, they may lose their bargaining power in the

negotiation of executive pension or deferred compensation plan with creditors. Therefore, we

believe that firms with executive pension or deferred compensation plans would prefer the

Chapter 11 reorganization to a workout, especially before the amendment of the Bankruptcy

law.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

However, the situation has been systematically changed since the introduction of the

BAPCPA in 2005. The BAPCPA was initially drafted in 1997 and introduced to the U.S.

Congress in 1998 but it had gone through a long history of controversies until the 109th U.S.A.

3 It is noteworthy that the studies arguing that executive pension or deferred compensation plans are a form of inside debt generally use samples after 2006, due to the electronic accessibility to the ExecuComp database.

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Congress passed ‘The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(BAPCPA)’ on April 14, 2005 and President George W. Bush signed into the law on April 20,

2005. The Act actually applied to the cases filed on or after October 17, 2005. The Act

primarily aims to protect creditors and consumers from their debtors’ strategic choice of

formal bankruptcy. In other words, the Act is intended to make it more difficult for debtors to

file a Chapter 7 Bankruptcy which forgives or discharges most debts. One of the bill’s key

supporters, Congressman F. James Sensenbrenner Jr., said “This bill will help restore

responsibility and integrity to the bankruptcy system by cracking down on fraudulent,

abusive, and opportunistic bankruptcy claims.” The BAPCPA extensively impacts on both

personal and corporate debtors by significantly increasing the creditors’ influence on the

reorganization process (Sherman & Sterling LLP 2005). Particularly, it severely restricts the

payment of non-qualified plan benefit such as executive pension or deferred compensation

plans by the bankrupt companies. Under the BAPCPA, debtor companies who want to confer

administrative expense status on the executive pension or deferred compensation plan should

justify (i) why such transfer or obligation is “essential to the retention of the insiders” and (ii)

why the services of that insiders are “essential to the survival of the business”. Even after the

two justifications are approved by the court, the maximum transfer or obligation permitted

under the Act cannot be greater than 10 times of the mean transfer or obligation of a similar

kind given to the non-management employees (“mean test”). For the effect of the BAPCPA,

Cornell et al. (2010) argue that although bankruptcy courts often approve the transfer of the

status of executive pension plans to administrative expenses before the implement of the Act,

agreeing with the debtors’ argument that payment of non-qualified pension plan would be

required to retain executives critical to the success of the restructuring, however, bankruptcy

courts become barely accept the payment of executive pension or deferred compensation plan

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since the amendments to the Bankruptcy Act in 2005. Overall, the BAPCPA makes it

extremely hard for the bankrupt companies to pay executive pension or deferred

compensation plan to their executives.

Therefore, we examine the impact of executive pension on the choice between the formal

Chapter 11 reorganization and a workout, considering the BAPCPA. Particularly we

hypothesize that before the implement of the Act, financially distressed firms with executive

pension or deferred compensation plans prefer the Chapter 11 reorganization to workouts but

the preference has been reversed since the amendments on the Bankruptcy Act in 2005. This

advances following hypothesis.

H1: Before the implement of the BAPCPA, financially distressed firms with

executive pension or deferred compensation plans would prefer the Chapter 11

reorganization to workouts but the preference would have been reversed from

the Chapter 11 reorganization to workouts since the implement of the BAPCPA.

III. Data and research design

Sample and data

We follow the sample selection procedure of Gilson (1989, 1990) and Gilson, John, and

Lang (1990). During the our entire sample period from 2001 to 2011, we first identify

financially distressed firms whose three-year cumulative calendar year-end returns on the

ordinary shares (Center for research in Security Prices (CRSP) share codes 10 and 11) are in

the bottom five CRSP database for each calendar year. If a firm has missing values of returns

for the calendar year, we replace the missing values with zero return. We exclude financial

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and utility firms (i.e., firms with standard industrial classification (SIC) codes of 4000-4999

and 6000 – 6999 in CRSP). Since we hand-collect the Chapter 11 reorganization or workout

cases by searching news, we also exclude firms whose book assets is less than $100 million

for the entire three years which we measure stock returns because the firms are too small

firms to attract the attention of news medias. Consist with Demiroglu and James (2013), we

also exclude firms whose leverage ratios are less than 30 percent and earnings before interest,

taxes, depreciation, and amortization (EBITA) to interest expense greater than three because

those firms are not likely to be financially distressed. This sampling procedure yields total

497 firm-years and 360 firms of financially distress.

Next, we collect the evidence of executive pension or (cash) deferred compensation by

searching proxy statement during the (-2, +2) calendar year window centered on the year at

the end of which the firm was ranked in the bottom five percent of the CRSP return

distribution. If a firm provides non-qualified retirement plans such supplementary executive

retirement plan or deferred cash compensation plan besides tax-qualified 401-k retirement

plan, we assume that the executives’ choice between the Chapter 11 reorganization and a

workout is affected by the executive pension or deferred compensation plans. In our sample,

154 (30.92%) firms of 497 financially distressed firms provide the executive pension or

deferred compensation plans.

Based on the sample, we collect the Chapter 11 reorganization or workout cases by

searching Lopucki’s Bankruptcy Research Database, Capital IQ, Audit Analytics, 10-K filings,

Google, and Factiva, during the (-2, +2) calendar year window centered on the year at the

end of which the firm was ranked in the bottom five percent of the CRSP return distribution.

Since the Chapter 11 reorganization starts with the formal filing at a bankruptcy court, we can

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easily identify the Chapter 11 reorganization. However, it is hard to identify workouts since

there is no such a formal filing for a workout. Following Gilson (1989, 1990) and Gilson et al.

(1990)’s definition of a workout, we identify workouts if the financially distressed firms

change their debt contracts and one or more of the following conditions are contained in the

debt contract: (1) required principal or interest payments on the debt is reduced; (2) the

maturity of debt is extended; (3) common stock or convertible securities are issued to debt

holders. In the identification of the Chapter 11 reorganization and workouts, we include only

initial firm-year if there are multiple firm-years sharing same restructuring case. Further, we

exclude firm-years if a firm conducts debt restructuring followed in less than two years from

another debt restructuring. As a result, we identify 127 workouts and 125 cases of the Chapter

11 reorganization from total 252 cases of debt restructuring.

Research model

To test H1, we estimate the logit regression model as in the model (1). Dependent

variable, Chapter11 is an indicator variable whose value equals one if a firm files for the

Chapter 11 reorganization during the fiscal year and zero otherwise. Since our sample

includes only debt restructuring cases either filing for the Chapter 11 reorganization or

conducting a workout, the dependent variable represents the probability of the Chapter 11

reorganization given that the firm chooses either the Chapter 11 reorganization or a workout.

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ℎ 11 = + + 2005 + ∗ 2005+ + + + + + + + + + + + % + % + + + (1) where represents an indicator variable whose value equals one if a firm has

executive pension or deferred compensation plans and zero otherwise. 2005 is another

indicator variable dividing our sample period before and after the implement of the BAPCPA4.

If an executive pension is treated as an unsecured debt claim under the Chapter 11

reorganization and thus, executives choose a workout to keep their pension value from the

Chapter 11, Pension will be negatively associated with the dependent variable. Otherwise,

Pension will be positively associated with the dependent variable, Chpater11. Our main

independent variable is the interaction term of Pension and ACT2005. As we hypothesize that

the Act has reversed the preference of debt restructuring from the Chapter 11 reorganization

to a workout, we expect negative sign on the coefficient of Pension*ACT2005. However,

using interaction term in nonlinear models such as logit and probit regression model may lead

to inappropriate interpretation about the marginal impact of the interaction term (Norton,

Wang, and Ai 2004; Powers 2005). In particular, Powers (2005) suggests for researchers to

4 Although the Act was implemented on October in 2005, we assume that firms were not affected by the Act during the entire 2005. Thus, ACT2005 equals one if a firm’s fiscal year end is before 2006.1.1 and zero after 2005.12.31. As also described in the sensitivity test section, we also perform many sensitivity tests without the sample of 2005. The results remain qualitatively same.

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use the subsample analysis complementally when interaction term is used in the non-linear

regression models. Following the suggestion, we use the subsample analysis dividing our

sample before and after the implement of the BAPCPA. By doing so, we believe that the

subsample analysis more clearly shows the economic significance of the relation between

executive pension and the choice between the Chapter 11 reorganization and a workout and

the differences before and after the implement of the BAPCPA.

Following various prior studies (Roe 1987; Gilson et al. 1990; Coffee and Klein 1991;

Gertner and Scharfstein 1991; Schartz 1993; Asquith et al. 1994; Chatterjee et al. 1995;

Jostarndt and Sautner 2010), we include different control variables which can affect a firm’s

choice between the Chapter 11 reorganization and a workout: LNAT (+), CASH (-),

Tangibility (+), LEV (+), Profitability (-), DEBTCOV(-), INTCOV (-), TobinQ (+), CAPEXP (-

), RDEXP (-), BTM (-), %Bankloan (+), %Secureloan (+). All predicted signs of the variables

are in parenthesis. LNAT equals the natural logarithm of total asset. CASH is cash and cash

equivalent scaled by total asset. Tangibility is the net amount of power, plant, and equipment

scaled by total asset. Profitability is the operating income before depreciation scaled by total

asset. DEBTCOV is the debt coverage calculated as dividing operating income before

depreciation by the total debt amount. INTCOV is the interest coverage calculated as dividing

operating income before depreciation by interest. TobinQ represents the Tobin’s Q-ratio to

capture the amount of intangible asset. CAPEXP is capital expenditure calculated as dividing

capital expenditure by lagged the amount of power, plants, and equipment. RDEXP is

research and development expenses. BTM is the book value of equity to market value of

equity ratio. %Bankloan is the bank loan to total debt ratio. %Secureloan is the secured loan

to total debt ratio. More detailed definitions of the variables are available in Appendix.

22

Basically, we obtain the control variables from Compustat database and we hand-collect

missing information about the control variables. We measure the control variables at the end

of the last fiscal year before the beginning date of debt restructuring. If we could not find the

missing information even by hand collection, we replaced the value with the latest value

within 5 previous years from the last fiscal year before the beginning date of debt

restructuring. If we could not find the missing information from Compustat or by hand-

collection for the entire 5 previous years from the last fiscal year-end before the beginning

date of debt restructuring, we replace the values by zero5. To reduce the influence of potential

outliers, we winsorized all continuous variables at the top and bottom one percentage level.

We also control for industry and year fixed effects.

IV. Results

Descriptive statistics

Panel A of Table 1 presents yearly distribution of debt restructurings. As shown, our

sample period includes some debt restructuring cases happen in 1999, 2000, 2012, and 2013.

It is because we searched the cases of debt restructuring during the (-2, +2) calendar year

window centered on the year at the end of which the firm was identified as financially

distressed firms from 2001 to 20116. In the yearly distribution, we do not find a certain time-

5 To alleviate the concern that the replacement can spoils the reliability of our sample, we run the regression model (1) without the variables. The results as shown in Table 7 remain qualitatively same with those with the variables.

6 In the sensitive tests, we examine our hypotheses with the sample in 2001 – 2011. The results tabulated in Table 7 remain same qualitatively.

23

series pattern of debt restructuring but we do find that debt restructurings particularly

increase during the economic recession (2001–2003 and 2008–2010).

Panel B of Table 1 shows industry distribution of debt restructuring cases. Since we use

Fama-French industry classification instead of two digit SIC codes to save the degree of

freedom in our logit regression model (1), a few firms not within SIC code 4000-4999 or

6000-6999 are classified as finance and utilities firms. Except for the finance and utilities

firms, debt restructurings seem to be evenly distributed across industries with most cases

found in information and technology industry (code 6 and 7).

Panel C of Table 1 presents the summary statistics of variables used in the regression

model (1). The mean value of Pension is 0.35. The ratio is smaller than those reported in

Bebchuck and Jackson (2005) and Sundaram and Yermack (2007). We believe that the

difference come from small-size firms included in our sample but not in their papers. In fact,

Bebchuck and Jackson (2005) and Sundaram and Yermack (2007) examine very large-size

firms in Standard and Poor’s (S&P) 500. In the comparison between the Chapter 11

reorganization and workout firms, firms providing executive pension are more likely to file

for the Chapter 11 reorganization than workouts but the difference is not statistically

significant. Other control variables known to affect the choice between the Chapter 11

reorganization and a workout have similar values with previous studies (Roe 1987; Gilson et

al. 1990; Coffee and Klein 1991; Gertner and Scharfstein 1991; Schartz 1993; Asquith et al.

1994; Chatterjee et al. 1995; Jostarndt and Sautner 2010). Particularly, firms with more

tangible asset, higher leverage ratio, less profitability, less interest coverage, and lower

Tobin’s Q ratio, less capital expenditures, greater book-to-market ratio are more likely to

choose the Chapter 11 reorganization than workouts to restructure their debt. The relations

24

are all statistically significant. However, the effects of other variables such as LNAT, CASH,

DEBTCOV, RDEXP, %Bankloan, and %Securedloan on the choice between the Chapter 11

reorganization and a workout are not statistically significant.

[Insert Table 1 about here]

Table 2 presents Pearson (upper triangle) and Spearman (down triangle) correlations

among variables included in our tests. The associations between our dependent variable,

Chapter11 and other variables are generally consistent with those reported in Panel C of

Table 1. Pension is positively associated with Chapter11 but the association is not

statistically significant. Other variables such as Tangibility, LEV, Profitability, INTCOV,

TobinQ, CAPEXP, and BTM have statistically significant associations with Chapter11 but the

variables whose effects was not significant in the t-tests still remain insignificant in the

correlation with Chapter11. We find no serious multicollinearity problem between the

independent variables.

[Insert Table 2 about here]

Univariate analysis

We perform various univariate t-tests. Table 3 reports the results. First, for the sample

covering entire sample period from 1999 to 2013, we compare the probability of the Chapter

11 reorganization between firms with executive pension plan and those without. Panel A of

Table 3 shows that firms providing executive pension or deferred compensation plans are

more likely to choose the Chapter 11 reorganization than workouts to restructure their debt

although the difference is not statistically significant. Second, we divide our sample period

based on the period before and after the implement of the BAPCPA. Before the BAPCPA, as

25

shown in Panel B, firms with executive pension plan are more likely to choose the Chapter 11

reorganization than workouts to restructure their debt. However, surprisingly, the preference

to the Chapter 11 reorganization of the firms with executive pension plan dramatically

changed. After the BAPCPA, the result in Panel C shows that firms with executive pension

plan are more likely to conduct workouts than the Chapter 11 reorganization. Although the

differences are not statistically significant, the dramatic change roughly implies the results at

the following multivariate tests.

[Insert Table 3 about here]

Multivariate analysis

Controlling for the characteristics of firm and outside debt holders affecting the choice

between the Chapter 11 reorganization and a workout, we estimate Equation (1) using logit

regression model with Chapter11 as the dependent variable and Pension and

Pension*ACT2005 as main independent variables. In addition, as mentioned above, we also

perform subsample analysis to alleviate the concerns over the use of interaction term in non-

linear models. Table 4 represents the regression results. In the first column, for the sample

covering entire sample period from 1999 to 2013, the coefficient of Pension is not

statistically significant. When we divide the sample into before and after the implement of the

BAPCPA, the coefficient of Pension in second column for the sample before BAPCPA is

positive and marginally significant. However, the sign of coefficient of Pension for the

sample after BAPCPA is surprisingly changed to negative and it is statistically significant as

shown in third column. The change is also confirmed when we use interaction term of

Pension and ACT2005. In forth column, the coefficient of the interaction term between

Pension and ACT2005 (Pension*ACT2005) is significantly negative. Given that the

26

coefficient of Pension in forth column is significantly positive, the negative coefficient of the

interaction term between Pension and ACT2005 supports our hypothesis that executive

pension distort executives’ incentive to choose the Chapter 11 reorganization before the

BAPCPA but the Act has reversed the managers’ incentives from the Chapter 11

reorganization to workouts. The effects of control variables on the choice between the

Chapter 11 reorganization and a workout are generally consistent with the expectation of

prior studies. Since the relations are generally same with the results in Table 1 and 2, we omit

further discussion on the control variables.

[Insert Table 4 about here]

Endogeneity issue

Some may raise the endogeneity issue because it is possible that a (omitted) factor

inducing a firm to provide executive pension or deferred compensation plan to its executives

can simultaneously enforce the firm to choose a certain way of debt restructuring. For

example, it is possible that large-size firms are more likely to have executive pension plan

and they simultaneously prefer to file for the Chapter 11 reorganization because large firms

usually have more ability to provide executive pension and to have more lenders. Remember

that Gilson et al. (1990), Gertner and Scharfstein (1994), and Jostarndt and Sautner (2010)

find that firms with more lenders are more likely to file for the Chapter 11 reorganization than

workouts.

To handle this endogeneity issue, we use the propensity-score matching models,

developed by Rosenbaum and Rubin (1983). First, we use a logit regression model to

estimate the probability that a firm has executive pension or deferred compensation plans.

27

Following the prevailing approach in estimating propensity (For example, Li and Prabhala

(2007)), we include all attributes also used in main logit regression model (1) when

estimating the propensity score as follows.

= + 2005 + + + + + + + + + + + +% + % + + + (2)

Without replacement, we then match firms having executive pension plan or deferred

compensation plan with firms not having them to have the closest predicted value from the

equation (2) within a maximum distance of 3 percent. Through this matching process, we

match approximately 70 percent. If our propensity-score matching procedure is successful,

there should be no systematic difference between treatment (firms having executive pension

plan or deferred compensation plan) and control groups (firms not having executive pension

plan or deferred compensation plan), except for existence of executive pension or deferred

compensation plan.

With the matched sample, we re-run the logit regression model (1). Table 5 represents the

regression results. The coefficient of Pension is negative at (one-sided) 10 percent significant

level for the sample covering entire sample period from 1999 to 2013. In the second and third

column, we find that the negative relation between Pension and Chapter11 is mostly driven

by the sample after the BAPCPA. Also, the coefficient of the interaction term between

Pension and ACT2005 (Pension*ACT2005) is still significantly negative at (two-sided) five

percent significance level, confirming the results in Table 4.

28

[Insert Table 5 about here]

Pension amount

We also examine how the preference to a certain debt restructuring way changes with the

amounts of executive pension or deferred compensation plan. If executive pension distorts

executives’ incentive to keep their pension value from the formal Chapter 11 bankruptcy, the

incentive should be stronger for the large amounts of executive pension. To test the relation,

we collect the information of pension amount through proxy statement. However,

unfortunately, not many firms disclose details of their executive pension plans, especially

before U.S.A Securities and Exchange Commission (SEC) implemented enhanced

compensation disclosure regulation in 2006. Therefore, our test is restricted to the 1347

samples in the period of 2006 - 2013. Our 134 samples consist of 42 firms with pension plan

and 92 firms without pension plan. The mean present values of executive pension or deferred

compensation plan of the 42 firms are 7.2 million dollars (40% of total compensation) for

named executives and 1.3 million dollars (61% of total compensation) for CEO, respectively.

The average pension amount is smaller than that reported in Sundaram and Yermack (2005)

using S&P 500 firms. Again, we believe that the difference comes from the difference in

sampling method.

To test the relation between pension amount and the preference to a workout after the

implement of the BAPCPA, we use pension amount (PAMT) instead of the dummy variable

(Pension). Table 7 presents the regression results. In Panel A, PAMT is all named executives’

present value of supplementary pension plan or deferred compensation plan deflated by sum

7 Of 149 total samples in the period after 2006, we exclude 15 samples because the sample firms do not disclose the pension amount in their proxy statement.

29

of their compensations. The result shows negative relation between PAMT and Chapter11 at

(two-sided) five percent significance level. In Panel B, PAMT is CEO’s present value of

supplementary pension plan or deferred compensation plan by his or her total compensation.

The relation between PAMT and Chapter11 remains significantly negative at (two-sided) 10

percent significance level. These results support the negative relation between Pension and

Chapter11 after the implement of the BAPCPA in Table 5 and 6.

[Insert Table 6 about here]

CEO turnover

Additionally, we examine whether the preference to workout is pronounced for the CEOs

leaving after the choice between the Chapter 11 reorganization and a workout. Since the Act

severely restricts the payment of executive pension in the process of the Chapter 11

reorganization, CEOs will not receive their executive pension or deferred compensation plans

if they leave their firms during the process of the Chapter 11 reorganization. Therefore, we

hypothesize that the preference to a workout after the implementation of the BAPCPA will be

more pronounced for the firms with CEOs leaving within three years after the bankruptcy

than those retaining CEOs.

To test the hypothesis, we employ another indicator variable, CEOTURN whose value is

one if a CEO leaves his or her firm within three years after the beginning of debt

restructuring and zero otherwise. In our sample, CEOTURN has the mean value of 0.53 in all

samples as shown in Panel C of Table 1. The ratio is greater than that of Gilson and

Vetsuypens (1993) reporting almost one-third of all CEOs are replaced after their firm filed

for bankruptcy or started privately debt restructuring. It may be because we include cases of

30

acquisition or litigation within three years after the beginning of the debt restructuring to our

CEO turnover cases, assuming CEOs’ pension value is hardly retained in those situations.

The difference of CEOTURN between the Chapter 11 reorganization and a workout is

statistically significant at one percent significance level (t-value is 3.08): CEOs filed for the

Chapter 11 reorganization are more likely to leave their firm within three years than those

conducting workout (mean values are 0.62 versus 0.50). The positive correlation between

CEOTURN and Chapter11 is also confirmed in the Pearson and Spearman correlation in

Table 2.

Our interests is on the three-way interaction variable among Pension, CEOTURN, and

ACT2005 (PENSION* CEOTURN*ACT2005). If CEOs leaving their firm within three years

after the beginning of bankruptcy are more likely to file for the Chapter 11 reorganization and

the preference is pronounced after the implement of the BAPCPA, the coefficient of

interaction term will be negative. Table 6 presents the regression results. The coefficient of

the interaction variable between Pension and CEOTURN (Pension*CEOTURN) is negative in

the sample covering entire sample period from 1999 to 2013 but it is not statistically

significant. In the comparison before and after the implement of the BAPCPA, the coefficient

of the interaction term of Pension and CEOTURN is insignificantly positive before the

BAPCPA but it is negative at (one-sided) 10 percent significant level after the Act. The

difference of the impact of CEOTURN on the relation between Pension and Chapter11 is also

confirmed in the model with three-way interaction term among Pension, CEOTURN, and

ACT2005 (Pension*CEOTURN*ACT2005). As shown in forth column, the coefficient of the

three-way interaction term is negative at (one-sided) 10 percent significant level, implying

that the preference to a workout after the implement of the Act is more pronounced for the

31

firms with CEOs leaving their firm within three years after they begin bankruptcy process.

[Insert Table 7 about here]

V. Sensitivity tests

We conduct several sensitivity tests. Table 7 shows the results. First, we estimate the

regression model (1) without the variables of DEBTCOV, INTCOV, CAPEXP,

RDEXP, %Bankloan, and %Securedloan. Some of the values of the variables are missing so

we replaced the missing values with zero values instead of deleting the observation in order

to keep debt restructuring cases as much as possible. However, the replacement may decrease

reliability of the results in this paper. To alleviate the concern, we conduct many sensitivity

tests with and without one or more of the suspicious control variables. The result in the first

column of Table 7 is one result of the various tests. In the first column, the coefficient of the

interaction term of Pension and ACT2005 is still negative at the five percent significant level.

Other many untabulated results from the tests with the combination of control variables

remain same qualitatively. Second, we exclude debt restructuring happening in 1999, 2000,

2012, and 2013. In the sample years, debt restructuring cases are not many because we

searched for the evidence of debt restructuring during the (-2, +2) calendar year window

centered on the year at the end of which the firm was identified as financially distressed firms

from 2001 to 2011. Thus, we test our hypothesis without the sample years. Second column of

Table 7 represent the results. The coefficient of the interaction term of Pension and ACT2005

remains negative at the five percent significant level. Third, we estimate the regression model

(1) without the sample period of 2005. The year of 2005 may not be appropriate sample year

32

to test the impact of the BAPCPA since it was implemented on October of 2005. Thus, we

test out hypothesis without the 2005 sample. Third column of the table 7 presents the results.

As like the other sensitive tests, the coefficient of the interaction term of Pension and

ACT2005 is still negative at (two-sided) five percent significant level.

[Insert Table 8 about here]

VI. Conclusion

The literature on the choice between the Chapter 11 reorganization and a workout has

mostly examined the characteristics of outside debt holders. Turing our attention to inside

debt from outside debt, we find that inside debt (executive pension) affects firms’ decisions

on the choice between Chapter 11 reorganization and a workout. More specifically,

financially distressed firms with inside debt are more likely to choose the Chapter 11

reorganization than workouts but the preference has been dramatically reversed since the

implement of the BAPCPA. The results remain qualitatively same in the test with matched

sample and various sensitivity tests. Overall, the results imply that executive pensions or

deferred compensation plans distort executives’ incentives to keep their pension value from

the choice between the Chapter 11 reorganization and a workout.

However, this paper has some limitations. First, we do not examine how the preference

to a certain debt restructuring way changes with the amounts of executive pension or deferred

compensation plan before the implement of the BAPCPA. If executive pension distorts

executives’ incentive to keep their pension value under the formal Chapter 11 bankruptcy, the

incentive would be stronger for the large amounts of executive pension. However, the

33

limitation of sample collection before 2006 does not allow examining the effect of pension

amount on a firm’s preference to a certain debt restructuring way. Second, we do not consider

the lump-sum option of executive pension plan or deferred compensation plan which some

firms provide. As exampled by Enron, entrenched executives can exercise their lump-sum

option right before their firm goes to bankruptcy if their firm provides the lump-sum options

to executives. Although not many firms provide the lump-sum option and it is hard for

executives to exercise the option shortly before bankruptcy, if it is possible, executives will

exercise the lump-sum option in the anticipation of bankruptcy. If it is the usual case, no

longer their choice between the Chapter 11 reorganization or a workout will be affected by

the executive pension or deferred compensation. Third, we do not measure how much of the

debt restructuring firms’ litigation value is damaged by the inefficient choice of managers

with executive pension or deferred compensation plan. Before the implement of the Act,

firms with executive pension plan were more likely to choose the costly Chapter 11

reorganization than a workout. The choice would decrease the firm’s litigation value which

should be taken by other outside debt holders.

Despite the limitations, this paper still contributes to the literature in some aspects. First,

this paper finds the effect of inside debt on the financially distressed firms’ choice between

Chapter 11 and workout. Second, this paper concludes debate on whether executive pension

or deferred compensation is treated as other unsecured debt claims in bankruptcy. Third, this

paper investigates the implication of the Act.

34

Appendix

Description of variables

This table summarizes the variables used in the paper. Control variables are

measured at the end of (or during) the last fiscal year before the beginning date of debt

restructuring. Control variables are basically obtained from the Compustat database (All

names in parentheses refer to the item names used in the Compustat database). We also

collect the missing information in Compustat by searching annual reports (10-K) in

Electronic Data-Gathering, Analysis, and Retrieval system (EDGAR) of U.S. SEC. If we

could not find the missing information by searching 10-K, we replaced the value with the

latest value within five previous years from the last fiscal year before the beginning date of

debt restructuring. Also, if we could not find the information within the five previous years,

we replace the value with zero. To reduce the influence of potential outliers, all continuous

variables are winsorized at the top and bottom one percentage level.

Variable Definition

Chapter11 An indicator variable whose value equals one if a firm files for Chapter 11 bankruptcy in the choice between Chapter 11 and workout. Otherwise, it has zero value.

Pension

An indicator variable whose value is one if a firm has executive pension plan or (cash) deferred compensation plan during the (-2, +2) calendar year window centered on the year at the end of which the firm was identified as financially distressed firms from 2001 to 2011 and zero otherwise.

ACT2005 An indicator variable whose value is one if a firm’s fiscal year is after the implement of the Act of 2005 and zero otherwise.

PAMT Present value of accumulated pension benefit of total named executives

or CEO deflated by their total compensation.

CEOTURN An indicator variable whose value is one if a CEO leaves his or her firm after the beginning of debt restructuring and zero otherwise

35

(Continues)

Variable Definition LNAT Natural logarithm value of total assets (AT)

CASH Cash and cash equivalent (CHE) divided by total asset (AT).

Tangibility Net power, plan, and equipment (PPENT) divided by total asset (AT)

LEVE Total debt (debt in current liabilities (DLC) + long-term debt (DLTT)) divided by total asset (AT)

Profitability Operating income before depreciation (OIBDP) divided by total asset

(AT)

DEBTCOV Operating income before depreciation (OIBDP) divided by total debt

(DLC + DLTT)

INTCOV Operating income before depreciation (OIBDP) divided by interest and

related expense (XINT)

TobinQ Market value of equity (Share price at the end of fiscal year (PRCC_F) * Common shares outstanding (CSHO)) plus total asset (AT) minus book value of equity (CEQ), divided by total asset (AT)

CAPEXP Capital expenditures (CAPX) divided by lagged net power, plant, and

equipment (PPENT)

RDEXP Research and development expense (XRD) divided by total asset.

BTM Book (CEQ) to market (PRCC_F * CSHO) ratio

%Bankloan Total bank loan divided by total liabilities (LT)

%Securedloan Total secured debt divided by total liabilities (LT)

36

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Table 1

Sample selection process and descriptive statistics

Panel A: Yearly distribution of debt restructuring cases Year Total Bankruptcy Workout 1999 1 0 1 2000 3 1 2 2001 12 7 5 2002 23 12 11 2003 23 14 9 2004 18 9 9 2005 23 8 15 2006 13 6 7 2007 17 9 8 2008 21 13 8 2009 45 20 25 2010 22 8 14 2011 14 8 6 2012 9 4 5 2013 8 6 2

252 125 127

Panel B: Industry distribution of debt restructuring cases Code Fama-French industry classification Frequency

1 Consumer NonDurables -- Food, Tobacco, Textiles, Apparel, Leather, Toys 15 2 Consumer Durables -- Cars, TVs, Furniture, Household Appliances 14 3 Manufacturing -- Machinery, Trucks, Planes, Off Furn, Paper, Com Printing 28 4 Oil, Gas, and Coal Extraction and Products 7 5 Chemicals and Allied Products 8 6 Business Equipment -- Computers, Software, and Electronic Equipment 46 7 Telephone and Television Transmission 32 8 Utilities 1 9 Wholesale, Retail, and Some Services (Laundries, Repair Shops) 26

10 Healthcare, Medical Equipment, and Drugs 17 11 Finance 4 12 Other -- Mines, Constr, BldMt, Trans, Hotels, Bus Serv, Entertainment 54

Total 252

41

(Continues)

Panel C: Summary statistic

All (Na=252)

Chapter 11 (N=125)

Workout (N=127)

Difference (Chapter 11 – Workout)

Variablesb Mean Median S.D. Mean Median S.D. Mean Median S.D. (t-statc) (z-statd) Pension 0.35 0.00 0.48 0.36 0.00 0.48 0.34 0.00 0.48 0.02 (0.36) (0.35)

CEOTURN 0.53 1.00 0.50 0.62 1.00 0.49 0.43 0.00 0.50 0.19 (3.08) *** (3.03) *** LNAT 5.90 5.86 1.36 5.98 6.01 1.42 5.83 5.70 1.31 0.15 (0.84) (1.40) CASH 0.11 0.06 0.16 0.10 0.05 0.15 0.13 0.06 0.17 -0.03 (-1.23) (-0.99)

Tangibility 0.31 0.24 0.25 0.36 0.31 0.25 0.27 0.17 0.25 0.09 (2.81) *** (3.12) *** LEV 0.53 0.45 0.44 0.59 0.50 0.49 0.47 0.42 0.38 0.12 (2.19) ** (1.85) *

Profitability -0.11 0.01 0.36 -0.18 -0.01 0.45 -0.04 0.02 0.23 -0.14 (-3.07) *** (-2.04) ** DEBTCOV -1.00 0.02 5.01 -1.42 0.00 5.98 -0.59 0.04 3.78 -0.83 (-1.31) (-1.52) INTCOV -7.14 0.33 48.27 -11.28 -0.15 57.98 -3.07 0.65 36.06 -8.20 (-1.35) (-2.22) ** TobinQ 0.36 0.63 2.51 0.16 0.72 3.52 0.55 0.56 0.57 -0.39 (-1.25) (-2.35) **

CAPEXP 0.27 0.06 0.92 0.12 0.00 0.65 0.42 0.11 1.11 -0.29 (-2.57) ** (-7.28) *** RDEXP 0.05 0.00 0.14 0.06 0.00 0.19 0.04 0.00 0.08 0.02 (-1.12) (-1.64)

BTM 3.97 -0.17 39.22 5.05 0.05 32.87 2.90 -0.55 44.71 2.15 (0.43) (2.99) *** %Bankloan 0.29 0.23 0.26 0.29 0.24 0.25 0.29 0.22 0.27 0.00 (0.07) (0.42)

%Securedloan 0.35 0.32 0.28 0.37 0.35 0.27 0.33 0.28 0.29 0.04 (1.19) (1.28) a The number of observations b Variable definitions are in Appendix. c The t-statistics are obtained from t-tests. d The z-statistics are obtained from a Wilcoxon rank-sum test. The superscripts *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively (two sided).

.

42

Table 2 Correlation

# Variablesa (Nb=252) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 Chapter11 0.02 0.19 0.31 0.13 0.05 -0.08 0.18 0.14 -0.19 -0.08 -0.09 -0.08 -0.16 0.07 0.03 0.00 0.08

(0.72)c (0.00) (0.00) (0.04) (0.40) (0.22) (0.01) (0.03) (0.00) (0.19) (0.18) (0.21) (0.01) (0.26) (0.66) (0.94) (0.23)

2 Pension 0.02 -0.02 -0.05 -0.04 0.32 -0.11 0.14 0.03 0.22 0.08 0.08 0.06 -0.05 -0.19 -0.04 0.14 0.02 (0.72) (0.70) (0.45) (0.48) (0.00) (0.08) (0.03) (0.66) (0.00) (0.22) (0.22) (0.37) (0.43) (0.00) (0.53) (0.03) (0.72)

3 CEOTURN 0.19 -0.02 0.31 0.50 -0.01 -0.14 0.13 0.04 -0.05 -0.02 -0.08 0.08 -0.01 -0.01 -0.10 0.03 0.03 (0.00) (0.70) (0.00) (0.00) (0.85) (0.03) (0.04) (0.53) (0.41) (0.71) (0.19) (0.18) (0.88) (0.86) (0.11) (0.61) (0.66)

4 Litigation 0.31 -0.05 0.31 0.18 -0.12 -0.05 -0.02 -0.04 -0.21 -0.11 -0.15 -0.03 -0.09 0.11 -0.04 0.04 0.00 (0.00) (0.45) (0.00) (0.00) (0.05) (0.42) (0.81) (0.51) (0.00) (0.09) (0.02) (0.63) (0.14) (0.09) (0.51) (0.50) (0.97)

5 Acquisition 0.13 -0.04 0.50 0.18 -0.17 -0.03 0.04 0.00 -0.02 -0.12 0.00 0.05 -0.05 -0.03 0.00 -0.02 -0.02 (0.04) (0.48) (0.00) (0.00) (0.01) (0.65) (0.55) (0.94) (0.81) (0.06) (0.96) (0.42) (0.46) (0.58) (0.97) (0.72) (0.73)

6 LNAT 0.09 0.32 -0.01 -0.12 -0.16 -0.21 0.11 0.12 0.44 0.26 0.30 0.24 0.02 -0.39 -0.01 0.05 -0.02 (0.16) (0.00) (0.87) (0.07) (0.01) (0.00) (0.08) (0.06) (0.00) (0.00) (0.00) (0.00) (0.69) (0.00) (0.83) (0.47) (0.78)

7 CASH -0.06 -0.05 -0.09 -0.08 -0.10 -0.14 -0.28 -0.09 -0.24 -0.17 -0.23 -0.15 0.16 0.41 0.07 -0.27 -0.22 (0.32) (0.46) (0.15) (0.22) (0.13) (0.03) (0.00) (0.15) (0.00) (0.01) (0.00) (0.01) (0.01) (0.00) (0.30) (0.00) (0.00)

8 Tangibility 0.20 0.17 0.12 0.02 0.01 0.10 -0.23 0.21 0.09 0.11 0.03 0.00 -0.12 -0.15 -0.03 0.20 0.18 (0.00) (0.01) (0.06) (0.70) (0.85) (0.10) (0.00) (0.00) (0.17) (0.08) (0.63) (0.94) (0.07) (0.02) (0.58) (0.00) (0.00)

9 LEV 0.12 0.04 0.04 -0.08 0.00 0.21 -0.14 0.32 0.15 0.19 0.15 0.21 -0.10 -0.11 -0.04 0.12 0.18 (0.06) (0.51) (0.52) (0.20) (0.97) (0.00) (0.03) (0.00) (0.02) (0.00) (0.02) (0.00) (0.13) (0.07) (0.48) (0.05) (0.00)

10 Profitability -0.13 0.22 -0.05 -0.21 -0.07 0.38 -0.19 0.13 0.24 0.42 0.48 0.30 -0.11 -0.71 -0.09 0.16 0.08 (0.04) (0.00) (0.39) (0.00) (0.30) (0.00) (0.00) (0.04) (0.00) (0.00) (0.00) (0.00) (0.08) (0.00) (0.13) (0.01) (0.23)

11 DEBTCOV -0.10 0.21 -0.02 -0.14 -0.07 0.34 -0.20 0.17 0.17 0.88 0.45 0.34 0.02 -0.46 0.03 0.16 0.16 (0.13) (0.00) (0.71) (0.02) (0.28) (0.00) (0.00) (0.01) (0.01) (0.00) (0.00) (0.00) (0.79) (0.00) (0.62) (0.01) (0.01)

12 INTCOV -0.14 0.18 -0.07 -0.18 -0.06 0.36 -0.23 0.13 0.19 0.90 0.90 0.10 0.03 -0.54 0.03 0.01 0.03 (0.03) (0.00) (0.27) (0.00) (0.32) (0.00) (0.00) (0.05) (0.00) (0.00) (0.00) (0.10) (0.60) (0.00) (0.62) (0.92) (0.64)

13 TobinQ 0.15 0.19 -0.02 -0.16 0.02 0.34 -0.15 0.16 0.52 0.44 0.41 0.40 0.00 -0.30 0.05 0.04 0.09 (0.02) (0.00) (0.76) (0.01) (0.72) (0.00) (0.02) (0.01) (0.00) (0.00) (0.00) (0.00) (0.97) (0.00) (0.44) (0.51) (0.17)

14 CAPEXP -0.46 -0.02 -0.07 -0.32 -0.14 0.13 0.08 -0.13 0.03 0.33 0.28 0.35 -0.09 0.11 -0.06 -0.07 -0.09 (0.00) (0.81) (0.29) (0.00) (0.03) (0.03) (0.19) (0.04) (0.69) (0.00) (0.00) (0.00) (0.18) (0.08) (0.34) (0.27) (0.16)

15 RDEXP -0.10 -0.14 -0.12 0.07 -0.16 -0.25 0.44 -0.20 -0.25 -0.36 -0.35 -0.36 -0.33 0.08 0.01 -0.17 -0.14 (0.10) (0.03) (0.06) (0.28) (0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.23) (0.83) (0.01) (0.02)

16 BTM 0.19 0.00 -0.01 -0.05 0.04 -0.01 0.07 0.06 0.30 0.19 0.20 0.22 0.38 -0.05 -0.08 -0.14 0.00 (0.00) (0.98) (0.89) (0.46) (0.50) (0.90) (0.25) (0.37) (0.00) (0.00) (0.00) (0.00) (0.00) (0.39) (0.19) (0.02) (0.97)

17 %Bankloan 0.03 0.16 0.03 0.07 -0.02 0.12 -0.37 0.21 0.19 0.21 0.25 0.20 0.13 -0.04 -0.38 -0.11 0.70 (0.68) (0.01) (0.60) (0.24) (0.70) (0.05) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.04) (0.50) (0.00) (0.07) (0.00)

18 %Securedloan 0.08 0.04 0.03 0.00 -0.01 0.03 -0.29 0.17 0.22 0.16 0.18 0.12 0.20 -0.13 -0.31 0.03 0.70 (0.20) (0.51) (0.59) (0.95) (0.81) (0.65) (0.00) (0.01) (0.00) (0.01) (0.00) (0.07) (0.00) (0.04) (0.00) (0.61) (0.00)

43

(Continues)

a Variable definitions are in Appendix. b The number of observations c The p-values are in parentheses. Pearson (Spearman) correlations are below (above) the diagonal. All continuous variables are winsorized at the top and bottom 1 percentage level.

44

Table 3

Univariate t-tests

Panel A: Comparison of the probability of Chapter 11 between firms providing executive pension plan or deferred compensation plan to their executives and the others

Total Pensiona=1 (Nb=88)

Pension=0 (N=164)

Difference (1-0)

(N=252) Mean Median Mean Median (t-statc) (z-statd)

Pr(Chapter11=1 | Workout=0) 0.51 1.00 0.49 0.00 0.02 (0.36) (0.35)

Panel B: Comparison of the probability of Chapter 11 between firms providing executive pension plan or deferred compensation plan to their executives and the others, before the implement of the 2005 Act

Before the Act Pension=1 (N=30)

Pension=0 (N=72)

Difference (1-0)

(N=102) Mean Median Mean Median (t-stat) (z-stat)

Pr(Chapter11=1 | Workout=0) 0.60 1.00 0.46 0.00 0.14 (1.30) (1.29)

Panel C: Comparison of the probability of Chapter 11 between firms providing executive pension plan or deferred compensation plan to their executives and the others, after the implement of the 2005 Act

After the Act Pension=1 (N=58)

Pension=0 (N=92)

Difference (1-0)

(N=150) Mean Median Mean Median (t-stat) (z-stat)

Pr(Chapter11=1 | Workout=0) 0.47 0.00 0.51 1.00 -0.05 (0.54) (0.54) a Variable definitions are in Appendix. b The number of observations

c The t-statistics are obtained from t-tests. d The z-statistics are obtained from a Wilcoxon rank-sum test. The superscripts *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively (two sided).

45

Table 4

Logit regression results

Dependent variable: Chapter11

Variablea Expected Sign

1999~2013 Before the Act

After the Act 1999~2013

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Intercept -2.60 -9.97 -1.59 6.36 (-1.64) (-3.26) (-0.54) (0.04)

Pension +/- -0.12 1.71* -1.61** 1.08* (-0.31) (1.88) (-2.13) (1.73)

ACT2005 ? -9.25

(-0.06)

Pension*ACT2005 - -1.95**

(-2.46) Control variables

LNAT + 0.45*** 1.04*** 0.34 0.49*** (2.99) (2.77) (1.11) (3.11)

CASH - 0.16 -11.62** -1.79 0.88 (0.12) (-2.05) (-0.73) (0.62)

Tangibility + 1.43** 4.27*** 1.02 1.55** (1.98) (2.72) (0.73) (2.11)

LEV + 1.29*** 2.61** 1.77* 1.28** (2.65) (2.45) (1.69) (2.57)

Profitability - -4.33*** -7.15* -7.18*** -4.53*** (-4.05) (-1.95) (-2.94) (-4.12)

DEBTCOV - -0.08* -0.30 -0.01 -0.10** (-1.85) (-0.93) (-0.07) (-2.03)

INTCOV - 0.01 0.04 -0.01 0.01 (0.46) (0.69) (-0.85) (0.63)

TobinQ + -0.12 -1.08 2.45*** -0.12 (-1.33) (-1.51) (2.97) (-1.25)

CAPEXP - -0.94*** -0.64 -10.34*** -1.00*** (-2.77) (-1.61) (-2.79) (-2.93)

RDEXP - -1.42 31.92*** -4.59 -1.80 (-0.52) (2.73) (-1.00) (-0.66)

BTM - -0.01 0.01 -0.01 -0.01 (-0.14) (1.04) (-0.62) (-0.15)

%Bankloan + -1.26 -2.34 0.62 -1.11 (-1.29) (-0.93) (0.37) (-1.14)

%Securedloan + 1.21 2.02 -0.77 1.18 (1.38) (0.97) (-0.44) (1.34)

Year dummy Yes Yes Yes Yes Industry dummy Yes Yes Yes Yes

# of Observations 252 102 150 252 R2 0.319 0.483 0.511 0.339

Notes: a. Variable definitions are in Appendix. All continuous variables are winsorized at the top and bottom 1 percentage level. *, **, *** denote significance levels (two-sided) of 10%, 5%, and 1%, respectively.

46

Table 5 Logit regression results with matched sample by propensity score matching

Dependent variable: Chapter11

Variablea Expected Sign

1999~2013 Before the Act

After the Act 1999~2013

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Intercept 5.35 -21.67 43.64 0.01 (0.08) (-0.11) (0.02) (0.00)

Pension +/- -1.00† 1.90 -48.94† 1.40 (-1.37) (0.03) (-1.32) (0.98)

ACT2005 ? 6.00

(0.05)

Pension*ACT2005 - -3.98**

(-2.07) Control variables

LNAT + 0.30 3.51 -8.48 0.19 (0.82) (0.14) (-0.39) (0.49)

CASH - -3.96 18.68 159.40 -0.86 (-0.97) (0.06) (1.06) (-0.19)

Tangibility + 0.33 19.05 -19.07 1.01 (0.21) (0.13) (-0.51) (0.58)

LEV + 1.37 8.18 6.47 2.26 (1.22) (0.08) (0.07) (1.70)*

Profitability - -3.91 -68.83 -66.97 -4.44 (-1.41) (-0.11) (-0.23) (-1.33)

DEBTCOV - 0.37 7.75 11.25 0.37 (0.71) (0.03) (0.29) (0.79)

INTCOV - 0.01 0.13 0.01 0.02 (0.32) (0.09) (0.00) (0.57)

TobinQ + -0.38 2.01 53.13 -0.56 (-0.74) (0.04) (0.51) (-0.63)

CAPEXP - -8.55*** -0.33 -57.18 -8.89*** (-2.75) (-0.01) (-0.82) (-2.58)

RDEXP - 5.75 -384.20 417.00 8.60 (0.58) (-0.21) (0.47) (0.83)

BTM - 0.04* 0.10 0.41 0.04* (1.92) (0.06) (0.50) (1.87)

%Bankloan + -4.68** -49.24 -36.74 -5.42** (-2.21) (-0.35) (-0.56) (-2.30)

%Securedloan + 4.02* 29.13 6.64 4.33* (1.77) (0.22) (0.07) (1.69)

Year dummy Yes Yes Yes Yes Industry dummy Yes Yes Yes Yes

# of Observations 116 45 71 116 R2 0.531 0.747 0.743 0.552

Notes: a. Variable definitions are in Appendix. All continuous variables are winsorized at the top and bottom 1 percentage level. *, **, *** denote significance levels (two-sided) of 10%, 5%, and 1%, respectively. † denote significance level (one-sided) of 10%.

47

Table 6 Pension amount

Variablea Expected Sign

Dependent variable: Chapter11

Named executives CEO

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Intercept -0.45 -0.07 (-0.15) (-0.02)

PAMT - -2.55** -1.26* (-2.04) (-1.71)

Control variables LNAT + 0.16 0.09

(0.49) (0.28)

CASH - -2.75 -2.61 (-1.03) (-0.98)

Tangibility + 0.29 0.23 (0.19) (0.15)

LEV + 1.55 1.58 (1.50) (1.52)

Profitability - -6.03** -5.67** (-2.33) -2.25

DEBTCOV - -0.09 -0.13 (-0.43) (-0.59)

INTCOV - -0.01 -0.01 (-0.80) (-0.81)

TobinQ + 2.22*** 2.20** (2.63) (2.57)

CAPEXP - -10.26*** -10.38*** (-2.71) (-2.76)

RDEXP - -3.45 -3.37 (-0.74) (-0.73)

BTM - -0.01 -0.01 (-0.87) (-0.95)

%Bankloan + -0.13 -0.03 (-0.07) (-0.02)

%Securedloan + 0.10 0.24 (0.06) (0.14)

Year dummy Yes Yes Industry dummy Yes Yes

N 134 134 R2 0.506 0.503

Notes: a. Variable definitions are in Appendix. All continuous variables are winsorized at the top and bottom 1 percentage level. *, **, *** denote significance levels (two-sided) of 10%, 5%, and 1%, respectively.

48

Table 7 The impact of CEO turnovers

Dependent variable: Chapter11

Variablea Expected Sign

1999~2013 Before the Act

After the Act 1999~2013

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Intercept -2.61 -11.72 -1.72 6.43 (-1.66) (-3.23) (-0.55) (0.04)

Pension +/- 0.28 0.99 -0.71 0.41 (0.50) (0.73) (-0.72) (0.42)

CEOTURN ? 0.94** 0.87 1.34 0.76 (2.11) (0.88) (1.50) (1.17)

Pension*CEOTURN - -0.65 2.49 -1.62† 0.96 (-0.90) (1.11) (-1.30) (0.75)

ACT2005 ? -9.34

(-0.06)

Pension*ACT2005 - -0.57

(-0.47)

CEOTURN*ACT2005 - 0.15

(0.16)

Pension*CEOTURN*ACT2005 - -2.19†

(-1.39) Control variables

LNAT + 0.43*** 1.19*** 0.34 0.48*** (2.83) (2.64) (1.06) (3.01)

CASH - 0.38 -9.33 -2.49 1.08 (0.28) (-1.53) (-0.97) (0.73)

Tangibility + 1.37* 3.44** 0.89 1.41* (1.87) (2.10) (0.62) (1.89)

LEV + 1.11** 2.98** 1.42 1.10** (2.25) (2.26) (1.29) (2.16)

Profitability - -4.18*** -10.60** -6.91*** -4.41*** (-3.86) (-1.99) (-2.72) (-3.94)

DEBTCOV - -0.08* -0.37 0.05 -0.10** (-1.77) (-1.20) (0.24) (-2.03)

INTCOV - 0.01 0.07 -0.01 0.01 (0.60) (0.80) (-0.84) (0.71)

TobinQ + -0.13 -1.39 2.49*** -0.15 (-1.40) (-1.64) (2.89) (-1.47)

CAPEXP - -0.96*** -0.63 -10.32*** -1.02*** (-2.84) (-1.47) (-2.67) (-2.94)

RDEXP - -1.23 32.11*** -3.98 -1.43 (-0.44) (2.58) (-0.83) (-0.50)

BTM - 0.01 0.01 -0.01 0.01 (0.30) (1.28) (-0.33) (0.14)

%Bankloan + -1.22 -2.32 0.63 -1.13 (-1.22) (-0.95) (0.36) (-1.14)

%Securedloan + 1.21 2.17 -0.52 1.41 (1.34) (1.05) (-0.27) (1.53)

Year dummy Yes Yes Yes Yes Industry dummy Yes Yes Yes Yes

# of Observations 252 102 150 252 R2 0.332 0.511 0.520 0.357

49

(Continues)

Notes: a. Variable definitions are in Appendix. All continuous variables are winsorized at the top and bottom 1 percentage level. *, **, *** denote significance levels (two-sided) of 10%, 5%, and 1%, respectively. † denote significance level (one-sided) of 10%.

50

Table 8 Sensitivity tests

Dependent variable: Chapter11

Variablea Expected Sign

1999~2013 2001~2011 1999~2013 without 2005

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Coeff. Est. (t-statistics)

Intercept 7.51 5.75 -5.28 (0.05) (0.03) (-3.52)

Pension +/- 0.68 0.96 0.97 (1.20) (1.56) (1.38)

ACT2005 ? -9.41 -9.45 2.67** (-0.06) (-0.06) (2.05)

Pension*ACT2005 - -1.43** -1.68** -1.84** (-1.96) (-2.12) (-2.17)

Control variables LNAT + 0.38*** 0.44*** 0.46***

(2.71) (2.85) (2.82)

CASH - 0.22 0.75 0.90 (0.17) (0.53) (0.62)

Tangibility + 1.53** 1.43* 1.38* (2.22) (1.96) (1.75)

LEV + 1.26*** 1.13** 1.24** (2.71) (2.20) (2.39)

Profitability - -3.61*** -4.18*** -4.46*** (-4.36) (-3.81) (-3.91)

DEBTCOV - -0.10** -0.02

(-1.97) (-0.22)

INTCOV - 0.01 -0.01

(0.81) (-0.10)

TobinQ + -0.15 -0.12 -0.13 (-1.50) (-1.22) (-1.25)

CAPEXP - -0.92** -0.95***

(-2.74) (-2.71)

RDEXP - -1.03 -2.54

(-0.36) (-0.94)

BTM - -0.01 -0.01 -0.01 (-0.06) (-0.02) (-0.21)

%Bankloan + -0.67 -0.76

(-0.66) (-0.71)

%Securedloan + 0.87 0.90

(0.96) (0.94) Year dummy Yes Yes Yes

Industry dummy Yes Yes Yes # of Observations 252 231 229

R2 0.289 0.306 0.332 Notes: a. Variable definitions are in Appendix. All continuous variables are winsorized at the top and bottom 1 percentage level. *, **, *** denote significance levels (two-sided) of 10%, 5%, and 1%, respectively.