The Impact of Security Trading on Corporate Restructurings

Abstract:     
Hedge funds are heavily involved in restructurings through their debt holdings. A concern is that funds might short the equity of their debtors, reject a restructuring proposal, and trigger an inefficient liquidation to gain from their short position. We analyze the strategic game between a firm manager, who makes the proposal, and a fund, which trades in the firm’s securities. We show that if other investors are expected to buy in the equity market and the markets for debt and equity are informationally segregated then the manager's proposal allows the fund to profitably execute the above firm value destroying strategy.

Number of Pages in PDF File: 46

Keywords: debt restructuring, short-selling, hedge funds, empty creditors, distressed investing, merger proposals

JEL Classification: G30, G32, G33, G34

working papers series