Large Shareholders and Financial Distress
47 Pages Posted: 27 Mar 2019 Last revised: 4 Jan 2021
Date Written: March 13, 2019
Blockholders play a prominent role in distressed firms' access to finance. I develop a dynamic model of the interaction between these investors and distressed firms to examine blockholders' impact on efficiency and the distribution of value. The model captures key empirical facts on distressed equity issuances, including the provision of substantial discounts to large investors. Blockholders' impact on debt overhang problems is generically non-monotone. Whereas inefficiencies are exacerbated for intermediate levels of distress, they are alleviated in deep distress, when blocks are acquired in last-minute interventions. The paper proposes a novel set of modeling tricks that yield global solutions in environments with optimal default and learning, while only requiring the inversion of sparse matrices.
Keywords: Blockholders, Financial Distress, Credit Risk, Debt Overhang, Private Investments in Public Equity
JEL Classification: G12; G23; G32; G33; G38
Suggested Citation: Suggested Citation