Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U.S. Railroads in the Nineteenth Century

Abstract

This article describes the problems faced by reorganizers of distressed railroads in the late nineteenth century and how they were addressed by a combination of judicial intervention and financial innovations. In particular, the judicial innovations of supersenior financing, the equity receivership process, and the setting of upset values permitted firms to raise funds. The private financial innovations of deferred coupon debt, contingent charge securities, and voting trusts made subsequent default less likely. The private innovations can be interpreted as responses to both the distress of the railroads as well as the intervention by the courts that emasculated prior debt contracts.

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