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The Chrysler Effect: The Impact of Government Intervention on Borrowing Costs

57 Pages Posted: 16 Jul 2010 Last revised: 5 Nov 2013

Deniz Anginer

World Bank Research

A. Joseph Warburton

Syracuse University - College of Law; Syracuse University - Whitman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2012

Abstract

This paper studies intercreditor conflict arising from political interference in the bankruptcy process. The U.S. government’s intervention in the 2009 reorganizations of Chrysler and GM purportedly elevated claims of the auto union over those of the automakers’ senior creditors in violation of bankruptcy priority rules. Critics predicted that businesses would experience an increase in their borrowing costs because of the risk that politically-powerful junior claimants might now leap-frog other creditors. We examine the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. We find no evidence that bondholders of unionized firms reacted negatively to the government intervention and reject the claim that investors viewed the reorganizations as establishing a precedent for priority jumping by organized labor.

Keywords: Chrysler, General Motors, bankruptcy, TARP, government regulation, bailout, cost of capital

JEL Classification: G32, G33, G38, K2, K22, J5

Suggested Citation

Anginer, Deniz and Warburton, A. Joseph, The Chrysler Effect: The Impact of Government Intervention on Borrowing Costs (December 12, 2012). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1640801 or http://dx.doi.org/10.2139/ssrn.1640801

Deniz Anginer

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

A. Joseph Warburton (Contact Author)

Syracuse University - College of Law ( email )

Syracuse, NY 13244-1030
United States

Syracuse University - Whitman School of Management ( email )

Syracuse, NY
United States

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