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Stiffing the Creditor: The Effect of Asset Verifiability on Bankruptcy

75 Pages Posted: 7 Feb 2017 Last revised: 19 Jul 2017

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Rafael Matta

University of Amsterdam - Finance Group

Date Written: July 18, 2017

Abstract

Evidence suggests that asset pledgeability, debt complexity, and valuable control rights of dispersed debt influence distress resolution. We model how courts' imperfect verifiability of assets and valuable creditor control shape firms' debt structure and create coordination problems that determine distress outcomes and financing. We test the model's predictions using an exogenous variation in courts' ability to price assets: The 1999 U.S. Supreme Court surprise ruling requiring reorganization plans that keep stockholders' interest to be exposed to a "market test". We provide novel evidence showing that an improvement in creditor protection significantly increases bankruptcy filings and debt capacity of low-verifiability firms.

Keywords: Asset Verifiability, Bankruptcy, Chapter 11, Distress, Coordination, Creditor Protection

JEL Classification: G33, G34, G38

Suggested Citation

Giambona, Erasmo and Lopez de Silanes, Florencio and Matta, Rafael, Stiffing the Creditor: The Effect of Asset Verifiability on Bankruptcy (July 18, 2017). Available at SSRN: https://ssrn.com/abstract=2912366 or http://dx.doi.org/10.2139/ssrn.2912366

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rafael Matta

University of Amsterdam - Finance Group ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/pp/rmatta/

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