Out-of-Court Public Debt Restructuring and Debtholder-focused Investor Communication

57 Pages Posted: 31 Jul 2024

See all articles by Stacey Choy

Stacey Choy

University of Illinois at Urbana-Champaign - Gies College of Business

Y. Christine Liu

Bentley University

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: July 21, 2024

Abstract

Successfully conducting public debt out-of-court restructuring (OCR) requires near unanimous consent from dispersed bondholders. We predict and find that targeted investor communication by issuers is pivotal in alleviating information frictions between issuers and bondholders, thereby fostering consensus for successful OCR. Specifically, we find that debtholder-focused investor communication activities (Debt IC) are positively associated with the likelihood of OCR over costly Chapter 11 bankruptcy, while generic financial reporting information or shareholder-targeted communication has no such effect. Subsample analyses suggest that Debt IC is particularly effective when bondholders face challenges in assessing expected recovery rates or when issuers regularly engage in Debt IC, suggesting its role in conveying valuable forward-looking information and building relationships among bondholders. Additionally, we find that Debt IC helps reduce coordination frictions among dispersed debtholders. Overall, our findings highlight the unique role of Debt IC in enhancing the likelihood and effectiveness of public debt OCR for financially distressed firms.

Keywords: Information Environment, Investor Communication, Debt Markets, Public Debt, Outof-Court Restructuring, Insolvency, Bankruptcy

Suggested Citation

Choy, Stacey and Liu, Y. Christine and Vyas, Dushyantkumar, Out-of-Court Public Debt Restructuring and Debtholder-focused Investor Communication (July 21, 2024). Available at SSRN: https://ssrn.com/abstract=4900833

Stacey Choy (Contact Author)

University of Illinois at Urbana-Champaign - Gies College of Business ( email )

1206 South 6th Street
IL 61820

HOME PAGE: http://stacey-choy.github.io/

Y. Christine Liu

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6
Canada

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