The Impact of Security Trading on Corporate Restructurings
Konstantinos E. Zachariadis
London School of Economics
Ioan Florian Olaru
September 29, 2014
Hedge funds are heavily involved in corporate restructurings through their debt holdings. A concern is that funds might short-sell the equity of their debtors and vote for a value-reducing outcome to gain from their short position. We analyze the strategic game between a firm's manager, who makes a restructuring proposal, and a fund that can trade in the firm's securities. We show that, in equilibrium, the manager makes a proposal that allows the fund to profitably execute the above strategy if and only if the markets for debt and equity are segregated and other traders are buying equity on average.
Number of Pages in PDF File: 58
Keywords: debt restructuring, short-selling, hedge funds, empty creditors, distressed investing
JEL Classification: G30, G32, G33, G34
Date posted: August 3, 2010 ; Last revised: September 30, 2014
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