|MARUYAMA Hiroshi (Professor, Yokohama City University)
|April 2006 06-J-039
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Buyout fund activities, particularly those from abroad, emerged in Japan from the late 1990s. Examining the impact of such economic buyout fund activities is basic research essential to preface any discussion on possible regulations on buyout funds or government policies for corporate reorganization, mergers and acquisitions (M&As). As part of efforts to achieve that end, this research focuses on the fact that corporate reorganization cases in which buyout funds play a leading role have been increasing in number, and quantitatively analyzes the impact of these buyout funds on the recovery rate of reorganization claims. In cases where a failing company belonging to a declining industry is subject to buyout, a company outside the industry (outsider) that is financially unconstrained or relatively less constrained is likely to become the buyer because other companies within the industry (insiders) tend to face financial constraints. When a buyout fund, an outsider to whatever industry a failing company may belong, comes into play as a sponsor for the reorganization of a failing company belonging to a declining company, the recovery rate on reorganization claims for the industry may increase relative to the corresponding rates of other industries, thus resulting in the narrowing of gaps with booming industries. This is referred to as the "deep pocket hypothesis," which is compared with other alternative hypotheses in terms of accurate depiction of reality. More specifically, this research looks at cases in which reorganization proceedings began between 1990 and 2004 and estimates the functions determining the recovery rate on reorganization claims (defined as the ratio of the amount of claims outstanding as of the commencement of reorganization proceedings to the definitive amount of claims) respectively for reorganization cases commenced in the first nine years (1990-1998) during which buyout funds were inactive and those in the remaining six years (1999-2004) when buyout funds were active. With respect to cases in the first nine years, the dummy variable indicating that a company belongs to a declining industry is found to be a statistically significant negative value whereas no statistically significant finding is observed with respect to reorganizations in the following six years. These results are consistent with the deep pocket hypothesis. It is noteworthy that this analysis has detected the possible mechanism of how the involvement of buyout funds leads to the narrowing of gaps between the recovery rates on reorganization claims of declining industries with those of booming industries. The recovery rates in declining industries improve because buyout funds come into play as a sponsor for reorganizations in an industry within which sponsors have been hard to find, hence suppressing debt recovery ratios rather than simply because reorganizations are led by buyout funds. And if, as suggested, buyout funds are actually playing a certain role in corporate reorganizations in declining industries, an increase in the number of bankruptcy and reorganization proceedings led by buyout funds is perceived to be desirable from the viewpoint of improving the efficiency of such proceedings.