Repo Rollover Risk and the Bankruptcy Code
61 Pages Posted: 14 Feb 2013 Last revised: 26 Aug 2022
Date Written: June 1, 2015
Abstract
When the bankruptcy code protects the creditors’ rights with no impairments to secured creditors, issuance of debt with exemption from automatic stay adds no value. When the Code admits violations of absolute priority rules or results in collateral impairments to secured creditors, the liability structure includes short-term debt, with safe harbor protection when the pledged collateral satisfies a minimum liquidity threshold. Safe harbor rights lead firms to issue more short-term debt, less long-term debt, and increases the long-term spreads. Using the 1984 reform of the Code, we offer empirical evidence consistent with the predictions of the model.
Keywords: Run Risk, Safe Harbor Debt, Optimal Liability Structure, Capital Structure, Bankruptcy Code
JEL Classification: G12, G23
Suggested Citation: Suggested Citation