Bankruptcy Codes, Bargaining, and the Valuation of Distressed Securities

37 Pages Posted: 28 Apr 2010

See all articles by Marc-Olivier Lücke

Marc-Olivier Lücke

WHU - Otto Beisheim School of Management

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: April 20, 2010

Abstract

Do differences in creditor rights across countries affect creditors’ recovery rates in distressed exchanges? Theories of strategic debt service imply opposing effects, with borrowers in creditor friendly jurisdictions restructuring later but having lower deviations from the absolute priority rule.

Using a comprehensive sample of publicly listed companies from the United States (a relatively equity friendly jurisdiction) and the United Kingdom (a relatively creditor friendly jurisdiction) that have defaulted and restructured their debt between 1998 and 2008, we find a significant influence of creditor rights on both the timing of financial restructuring and deviations from absolute priority. Surprisingly, the effect of a delayed restructuring is more important than the reduction in deviations from absolute priority rule, resulting in overall lower creditor recovery rates for distressed exchanges in the United Kingdom compared to the United States.

Keywords: Reorganization, Bankruptcy code, Bargaining power, Recovery rate

JEL Classification: G12, G32, G33

Suggested Citation

Lücke, Marc-Olivier and Rudolf, Markus, Bankruptcy Codes, Bargaining, and the Valuation of Distressed Securities (April 20, 2010). Available at SSRN: https://ssrn.com/abstract=1595992 or http://dx.doi.org/10.2139/ssrn.1595992

Marc-Olivier Lücke (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
00491725729682 (Phone)

Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-(0)261-6509-420 (Phone)

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