The Chrysler Effect: The Impact of Government Intervention on Borrowing Costs
Virginia Tech Pamplin Business School; World Bank - Financial and Private Sector Development
A. Joseph Warburton
Syracuse University - College of Law; Syracuse University - Whitman School of Management
December 12, 2012
Journal of Banking and Finance, Forthcoming
This paper studies intercreditor conflict arising from political interference in the bankruptcy process. The U.S. government’s intervention in the 2009 reorganizations of Chrysler and GM purportedly elevated claims of the auto union over those of the automakers’ senior creditors in violation of bankruptcy priority rules. Critics predicted that businesses would experience an increase in their borrowing costs because of the risk that politically-powerful junior claimants might now leap-frog other creditors. We examine the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. We find no evidence that bondholders of unionized firms reacted negatively to the government intervention and reject the claim that investors viewed the reorganizations as establishing a precedent for priority jumping by organized labor.
Number of Pages in PDF File: 57
Keywords: Chrysler, General Motors, bankruptcy, TARP, government regulation, bailout, cost of capital
JEL Classification: G32, G33, G38, K2, K22, J5
Date posted: July 16, 2010 ; Last revised: November 5, 2013
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