Do Specialized Distress Investors Undermine Firms Ex Ante?

62 Pages Posted: 31 Mar 2023 Last revised: 14 Dec 2024

See all articles by Fernando Anjos

Fernando Anjos

Nova School of Business and Economics

Irem Demirci

Nova School of Business and Economics

Miguel Oliveira

Nova School of Business and Economics

Date Written: December 14, 2024

Abstract

We extend the canonical moral hazard model in corporate finance to include specialized distress investors (SDIs); and characterize how potential SDI entry affects credit rationing and project NPV ex ante. In the model, SDIs can cause negative spillovers even when adding value ex post, and conversely, SDIs that destroy value ex post may still prove beneficial ex ante. Furthermore, we demonstrate how firms can strategically influence the likelihood of SDI entry through project selection and choice of capital structure. Our work broadens our understanding of SDIs' role in corporate finance, by studying ex ante effects.

Keywords: distressed debt investors, vulture investors, financial distress, moral hazard, incomplete contracts, banking, reputation, bailouts

JEL Classification: G21, G23, G32, G33

Suggested Citation

Anjos, Fernando and Demirci, Irem and Oliveira, Miguel, Do Specialized Distress Investors Undermine Firms Ex Ante? (December 14, 2024). Available at SSRN: https://ssrn.com/abstract=4395807 or http://dx.doi.org/10.2139/ssrn.4395807

Fernando Anjos (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/site/fernandoanjossite/

Irem Demirci

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Miguel Oliveira

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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