Consider the following two statements: (i) ﬁrms that emerge from private workouts experience share price increases that are much greater
Than those for ﬁrms emerging from formal bankruptcies.
(ii) the direct costs of formal bankruptcies are much less than the costs of private workouts.

Question

Quizplus · Accepted Answer

Statement (i) is correct as research has shown that firms emerging from private workouts experience higher share price increases compared to those emerging from formal bankruptcies. This is because private workouts are typically negotiated between the distressed firm and its creditors, leading to a more consensual and less adversarial process that inspires greater confidence among investors.

Statement (ii) is incorrect as formal bankruptcies are associated with higher direct costs than private workouts. This is because formal bankruptcies involve court proceedings and the appointment of legal counsel and other professionals, leading to higher fees and administrative costs. On the other hand, private workouts are usually conducted more informally, with lower fees and expenses.

Consider the Following Two Statements: (I) ﬁRms That Emerge from Private