The Effect of APR Violations on the Seniority and Timing of Debt Issuance

48 Pages Posted: 18 Mar 2008

See all articles by Ronald Sverdlove

Ronald Sverdlove

New Jersey Institute of Technology, School of Management

Arturo Bris

IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance

S. Abraham Ravid

Yeshiva University - Syms School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: February 2008

Abstract

We present a model that shows how interactions between creditor groups in bankruptcy can affect the debt issuance decisions of firms, and test the most important implications of the theory. In particular, we show that firms that issue debt with a specific seniority level may tend to keep issuing debt at the same level to avoid the costs of conflicts in bankruptcy. Our model also has predictions as to what types of firms may change seniority level in sequential issues. We also find that as costs of conflict increase, firms will tend to issue more junior debt. The empirical implications of our model are consistent with the somewhat surprising fact that most firms issue debt at one seniority level only, and quite a few of them cluster at the senior subordinated level. Our probit analysis shows that companies that issue subordinated debt are much smaller than those that issue senior debt, while those that issue at both levels are intermediate on most financial measures. These empirical regularities are broadly consistent with our theoretical analysis. Our model is also supported by the fact that companies that issue only senior debt pay lower spreads than companies that issue at both levels. Finally, we find some support for our theory in an analysis of bankrupt firms.

Keywords: Seniority, Bankruptcy, Absolute Priority Rule violations, Debt

JEL Classification: G33

Suggested Citation

Sverdlove, Ronald and Bris, Arturo and Ravid, S. Abraham, The Effect of APR Violations on the Seniority and Timing of Debt Issuance (February 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1106444 or http://dx.doi.org/10.2139/ssrn.1106444

Ronald Sverdlove

New Jersey Institute of Technology, School of Management ( email )

United States
973-596-8569 (Phone)

Arturo Bris

IMD International ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

S. Abraham Ravid (Contact Author)

Yeshiva University - Syms School of Business ( email )

United States

Register to save articles to
your library

Register

Paper statistics

Downloads
135
rank
109,442
Abstract Views
963
PlumX Metrics