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Conflicts in Bankruptcy and the Sequence of Debt Issues

Published online by Cambridge University Press:  24 February 2016

S. Abraham (Avri) Ravid ,
Ronald Sverdlove ,
Arturo Bris  and
Gabriela Coiculescu
S. Abraham (Avri) Ravid*
Affiliation:
ravid@yu.edu, Yeshiva University, Sy Syms School of Business, New York, NY 10033
Ronald Sverdlove
Affiliation:
rsverdlo@njit.edu, New Jersey Institute of Technology, School of Management, Newark, NJ 07102
Arturo Bris
Affiliation:
arturo.bris@imd.ch, IMD, Lausanne CH-1001, Switzerland, and European Institute of Corporate Governance
Gabriela Coiculescu
Affiliation:
gabriela.coiculescu@yu.edu, Yeshiva University, Sy Syms School of Business, New York, NY 10033, and New York University.
*
*Corresponding author: ravid@yu.edu
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Abstract

This paper investigates the optimal sequencing of debt issues. Our theoretical model suggests that once firms issue debt with one level of seniority, they may have an incentive to alternate seniorities, because of violations of the priced absolute priority rule (APR). When we introduce explicit costs of class conflict, the model yields cases of alternating seniorities and other cases in which firms issue only one class of debt. The implications of the model are consistent with the observed regularities in a large database of debt issues. We test several other implications of our model as well.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 6 , December 2015 , pp. 1353 - 1388
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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