Bankruptcy Claims Trading

Abstract

A robust secondary market has emerged over the past twenty years in the debt of Chapter 11 firms. Critics worry that the trading associated with this market has undermined bankruptcy governance, by forcing managers to negotiate with shifting groups of activist investors in the Chapter 11 bargaining process. This paper investigates whether this is a common problem and concludes that it is not. Although trading of bond debt is pervasive, the activist groups that tend to participate in negotiations usually enter cases early and rarely change significantly. Trading in general, therefore, does not appear to have the impact on governance that many claims trading critics fear, at least insofar as the average case is concerned.

Keywords: bankruptcy; claims trading; Chapter 11; corporate restructuring

JEL Classification: G23, G30, G33