Conflicts in Bankruptcy and the Sequence of Debt Issues

51 Pages Posted: 12 Feb 2009 Last revised: 22 Apr 2013

See all articles by Arturo Bris

Arturo Bris

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

S. Abraham Ravid

Yeshiva University - Syms School of Business

Ronald Sverdlove

New Jersey Institute of Technology, School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 2009

Abstract

We present a model that shows how interactions between creditor groups in bankruptcy can affect the debt issuance decisions of firms. In particular, we suggest that deviations from APR should be priced and can affect the issuing decisions of junior and senior debt. Our model suggests that once firms issue debt with one level of seniority, they have an incentive to alternate, and subsequent issues will have a different seniority level. When we introduce explicit costs of conflict in our model, we find that as these costs increase, firms will tend to stay with one class of 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 never issue any senior debt. We also find that companies that issue only senior subordinated debt are much smaller than those that issue senior debt, while those that issue at both levels are intermediate on most financial measures. This is 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 study a sample of firms in bankruptcy and again find significant relationships between corporate characteristics and the types of debts that they issue, as predicted by the model.

Keywords: Bankruptcy, Absolute Priority Rule, Seniority, Debt

JEL Classification: G33

Suggested Citation

Bris, Arturo and Ravid, S. Abraham and Sverdlove, Ronald, Conflicts in Bankruptcy and the Sequence of Debt Issues (June 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1341443 or http://dx.doi.org/10.2139/ssrn.1341443

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

Ronald Sverdlove

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

United States
973-596-8569 (Phone)

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