Pricing Expected Deviations from Absolute Priority in Bankruptcy
35 Pages Posted: 23 Feb 2012 Last revised: 3 Sep 2012
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: Suggested Citation
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