The Impact of Security Trading on Corporate Restructurings
Konstantinos E. Zachariadis
London School of Economics
Ioan Florian Olaru
September 24, 2013
Hedge funds are heavily involved in corporate restructurings through their debt holdings. A concern is that funds might short the equity of their debtors, vote down a restructuring proposal, and force a firm into inefficient liquidation to gain from their short position. We analyze the strategic game between a firm manager, who makes a restructuring proposal to maximize equityholder value, and a fund that can trade in the debt and equity of the firm. We show that if the trades in the equity market of other non-strategic investors are positive in expectation, potentially because of short selling constraints, and markets are informationally segregated then the manager makes a proposal that allows the fund to profitably execute the above strategy to the detriment of firm value.
Number of Pages in PDF File: 49
Keywords: debt restructuring, short-selling, hedge funds, empty creditors, distressed investing, merger proposals
JEL Classification: G30, G32, G33, G34working papers series
Date posted: August 3, 2010 ; Last revised: September 24, 2013
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