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Information problems, conflicts of interest and asset stripping: chapter 11's failure in the case of Eastern airlines

Author: Wruck, K. H ; Weiss, Lawrence A.INSEAD Area: Accounting and Control Series: Working Paper ; 96/48/AC Publisher: Fontainebleau : INSEAD, 1996.Language: EnglishDescription: 35 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: Eastern Airlines' bankruptcy illustrates the devastating effect of court-sponsored asset stripping -using creditors' collateral to invest in negative net present value "lottery ticket" investments- on firm value. During its bankruptcy, Eastern's value dropped over 50%. The authors show that a substantial portion of this value decline occured because an over-protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down. The failure of Easrtern's Chapter 11 demonstrates the importance of the court's role in protecting a distressed firm's assets, not only from a run by creditors, but also from averly optimistic managers.
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Eastern Airlines' bankruptcy illustrates the devastating effect of court-sponsored asset stripping -using creditors' collateral to invest in negative net present value "lottery ticket" investments- on firm value. During its bankruptcy, Eastern's value dropped over 50%. The authors show that a substantial portion of this value decline occured because an over-protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down. The failure of Easrtern's Chapter 11 demonstrates the importance of the court's role in protecting a distressed firm's assets, not only from a run by creditors, but also from averly optimistic managers.

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