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Incentive effects of corporate debt reorganization

This paper examines decisions of the creditor at corporate bankruptcy time. When the bankruptcy occurs, there are two possible situations. One situation is that the firm goes into liquidation procedure and the creditor receives the residual assets. The other situation is that the firm keeps on operation by debt reorganization. In the paper, we discuss two ways of debt reorganization, debt for equity swap and debt relief plan. The creditor may choose liquidation or keeping the firm operating at bankruptcy moment according to comparing the values of liquidation and debt reorganization. The survey shows that the debt level has important effects on corporate bankruptcy decisions and debt reorganization decisions. For different level of debt, the firm will perform different decisions of liquidation or debt reorganization when the bankruptcy occurs. The analysis in the paper can be used as a reference to study on Chinese corporate debt and bankruptcy problems.