Priority Spreading of Corporate Debt

60 Pages Posted: 23 Dec 2016 Last revised: 26 Jan 2019

See all articles by Dominique C. Badoer

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance

Evan Dudley

Queen's University - Smith School of Business

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: January 25, 2019

Abstract

Priority spreading refers to the practice of firms increasing their reliance on secured and subordinated debt and reducing their reliance on senior debt as their credit quality deteriorates. We argue that priority spreading occurs, in part, because security provides creditors with greater protection from dilution from other creditors than covenants that prioritize payments. Consistent with this argument, we find that secured bank creditors are rarely diluted by junior creditors in distressed restructurings while senior unsecured creditors are frequently diluted, exogenous increases in asset volatility result in greater priority spreading and yields on senior and subordinated bonds converge as asset volatility increases.

Keywords: Debt Structure, Volatility, Priority, Leverage, Bankruptcy

JEL Classification: G32, G33

Suggested Citation

Badoer, Dominique C. and Dudley, Evan and James, Christopher M., Priority Spreading of Corporate Debt (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=2889315 or http://dx.doi.org/10.2139/ssrn.2889315

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Evan Dudley

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

Christopher M. James (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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