Conflicts in Bankruptcy and the Sequence of Debt Issues
53 Pages Posted: 12 Jan 2016
Date Written: November 7, 2015
This paper investigates the optimal sequencing of debt issues. Our theoretical model suggests that once firms issue debt with one level of seniority, they may have an incentive to alternate seniorities, because of priced absolute priority rule (APR) violations. When we introduce explicit costs of class conflict, the model yields cases of alternating seniorities and other cases where firms issue only one class of debt. The implications of the model are consistent with the observed regularities in a large database of debt issues. We test several other implications of our model as well.
Keywords: Bankruptcy, Absolute Priority Rule, Seniority, Debt
JEL Classification: G33
Suggested Citation: Suggested Citation