Corporate financial distress and reorganization: A survey of theoretical and empirical contributions

Abstract

Purpose – This paper presents both a theoretical and empirical review of the bankruptcy and reorganization literature. We point out the main articles developed in the field and present a group of studies carried out after the approval of the new bankruptcy law in Brazil. Design/methodology/approach – This paper provides a survey of the literature on bankruptcy and corporate reorganization. We investigate classic and recent papers in the field and present the results of some Brazilian studies that consider the announcement of the Brazilian bankruptcy law in 2005. Findings – We show that information asymmetry, coordination problems, and heterogeneity between creditors are pivotal to the resolution of financial distress. Moreover, the choice of restructuring is made according to the least-cost alternative. We discuss the practical implications of the literature by analyzing three cases of reorganization in Brazil and reveal that the complexity of each case can drive the decision to approve or reject the reorganization plan. Originality/value – We investigate the evolution of the bankruptcy and reorganization literature and provide a survey that explores both the international and Brazilian literature.