Pricing Expected Deviations from Absolute Priority in Bankruptcy

35 Pages Posted: 23 Feb 2012 Last revised: 3 Sep 2012

See all articles by Kimberly Cornaggia

Kimberly Cornaggia

Pennsylvania State University - Department of Finance

Timothy T. Simin

Pennsylvania State University

Arun Upneja

Boston University

Date Written: August 9, 2012

Abstract

We estimate pre-bankruptcy shareholders’ expected negotiating power using accounting information available at the bankruptcy filing. We find that the equity value on the day following the bankruptcy filing reflects theoretical determinants of priority violations. Specifically, the post-petition value of pre-bankruptcy shareholders’ claims on the bankrupt firms’ assets is positively related to the ratio of unsecured-to-secured debt, tax-loss-carry-forwards, and intangible asset value which would be lost in liquidation. Our results further suggest that the option to put leased assets back to the lessor increases shareholder power. Our results are (a) significant after controlling for firm size, financial health, and the likelihood of emergence; (b) not driven by multicollinearity in explanatory variables; and (c) robust to variation in post-bankruptcy equity valuation date.

Keywords: Bankruptcy, Financial Distress, Absolute Priority, Distressed Equity Valuation

JEL Classification: G30, G33

Suggested Citation

Cornaggia, Kimberly and Simin, Timothy T. and Upneja, Arun, Pricing Expected Deviations from Absolute Priority in Bankruptcy (August 9, 2012). Available at SSRN: https://ssrn.com/abstract=2010169 or http://dx.doi.org/10.2139/ssrn.2010169

Kimberly Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Timothy T. Simin

Pennsylvania State University ( email )

University Park, PA 16802
United States
814-865-3457 (Phone)

HOME PAGE: http://timsimin.net

Arun Upneja

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-6744 (Phone)

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