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Repo Rollover Risk and the Bankruptcy Code

61 Pages Posted: 14 Feb 2013 Last revised: 17 Jun 2015

Jun Kyung Auh

Georgetown University - Department of Finance

Suresh M. Sundaresan

Columbia Business School - Finance and Economics

Date Written: June 1, 2015

Abstract

When the bankruptcy code protects the creditors’ rights with no impairments to secured creditors, issuance of debt with exemption from automatic stay adds no value. When the Code admits violations of absolute priority rules or results in collateral impairments to secured creditors, the liability structure includes short-term debt, with safe harbor protection when the pledged collateral satisfies a minimum liquidity threshold. Safe harbor rights lead firms to issue more short-term debt, less long-term debt, and increases the long-term spreads. Using the 1984 reform of the Code, we offer empirical evidence consistent with the predictions of the model.

Keywords: Run Risk, Safe Harbor Debt, Optimal Liability Structure, Capital Structure, Bankruptcy Code

JEL Classification: G12, G23

Suggested Citation

Auh, Jun Kyung and Sundaresan, Suresh M., Repo Rollover Risk and the Bankruptcy Code (June 1, 2015). Columbia Business School Research Paper No. 13-8. Available at SSRN: https://ssrn.com/abstract=2217669 or http://dx.doi.org/10.2139/ssrn.2217669

Jun Kyung Auh

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

Suresh M. Sundaresan (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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