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The Impact of Security Trading on Corporate Restructurings

Konstantinos E. Zachariadis

London School of Economics

Ioan Florian Olaru

CastleRock Macro

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, G34

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Date posted: August 3, 2010 ; Last revised: August 29, 2014

Suggested Citation

Zachariadis, Konstantinos E. and Olaru, Ioan Florian, The Impact of Security Trading on Corporate Restructurings (September 24, 2013). Available at SSRN: http://ssrn.com/abstract=1652152 or http://dx.doi.org/10.2139/ssrn.1652152

Contact Information

Konstantinos E. Zachariadis (Contact Author)
London School of Economics ( email )
Houghton St
Department of Finance
London, WC2A 2AE
United Kingdom
+442079556541 (Phone)
+442078494647 (Fax)
HOME PAGE: http://www2.lse.ac.uk/finance/people/profiles/KostasZachariadis.aspx
Ioan F. Olaru
CastleRock Macro ( email )
101 Park Ave
New York, NY 10178
United States
Feedback to SSRN

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References:  38
Citations:  1

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