Absolute Priority Rule Violations, Credit Rationing, and Efficiency

Posted: 6 Mar 1998

See all articles by Stanley D. Longhofer

Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business

Abstract

Violations of the absolute priority rule (APR) are commonplace in private workouts, formal business reorganizations, and personal bankruptcies. While some theorists suggest they may arise endogenously, they are clearly magnified by the institutional structure of the bankruptcy code. This paper shows that APR violations exacerbate credit rationing problems by reducing the payment lenders receive in default states. Furthermore, APR violations make default more likely to occur, thereby making debt financing more costly. Together, these results support the view that APR violations create an impediment to efficient financial contracting.

JEL Classification: G33, G38, K20

Suggested Citation

Longhofer, Stanley D., Absolute Priority Rule Violations, Credit Rationing, and Efficiency. Available at SSRN: https://ssrn.com/abstract=45361

Stanley D. Longhofer (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

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HOME PAGE: http://webs.wichita.edu/longhofer

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