Common Ownership and Bankruptcy

Posted: 8 Jul 2021

See all articles by Ronald C. Anderson

Ronald C. Anderson

Temple University - Department of Finance

Farooq Durrani

University of Louisville

Kose John

New York University (NYU) - Department of Finance

Abstract

Distressed firms and the banks that lend to these firms often have conflicting interests when going through the Chapter 11 process, freefall bankruptcy vs prepack bankruptcy. We examine whether common ownership, i.e., an institution with holdings in both the borrowing and the lending firms, ameliorates this conflict of interest. The results show that in the presence of common ownership, distressed firms are over 3.3-times more likely to file for Chapter 11 freefall bankruptcy (rather than prepack) compared to the case without a common owner. Using ownership of passive funds as an instrument for common ownership, we provide evidence of a causal relation between common ownership and bankruptcy filing choice. Overall, the analysis indicates that common ownership in both financially distressed borrowing firms and their lending firms leads to a greater likelihood of Chapter 11 freefall bankruptcy filing; suggesting that common owners typically side with creditors to maximize their combined equity value in both the borrowing and lending firm.

Keywords: Bankruptcy, Common Ownership, Corporate Governance, Institutional Ownership

JEL Classification: G33, G30, G34, G32

Suggested Citation

Anderson, Ronald Craig and Durrani, Farooq and John, Kose, Common Ownership and Bankruptcy. NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3878395

Ronald Craig Anderson

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Farooq Durrani (Contact Author)

University of Louisville ( email )

Louisville, KY 40292
United States

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

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