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Does the Bond Market Predict Bankruptcy Settlements?

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  • Eberhart, Allan C
  • Sweeney, Richard J

Abstract

This study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded (i.e., usually junior claimants) bondholders. The data indicate that, on average, bondholders benefit, albeit slightly, from absolute priority rule violations. This paper also examines the degree to which the bond market, in the bankruptcy filing month, anticipates departures from the absolute priority rule and other influences on the payoff to bondholders. In other words, the authors investigate the informational efficiency of the market for bankrupt bonds. Overall, despite the complex and lengthy nature of bankruptcy proceedings, the results support efficiency. Copyright 1992 by American Finance Association.

Suggested Citation

  • Eberhart, Allan C & Sweeney, Richard J, 1992. "Does the Bond Market Predict Bankruptcy Settlements?," Journal of Finance, American Finance Association, vol. 47(3), pages 943-980, July.
    • Handle: RePEc:bla:jfinan:v:47:y:1992:i:3:p:943-80
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    Cited by:

    1. Anginer, Deniz & Warburton, A. Joseph, 2014. "The Chrysler effect: The impact of government intervention on borrowing costs," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 62-79.
    2. Khieu, Hinh D. & Mullineaux, Donald J. & Yi, Ha-Chin, 2012. "The determinants of bank loan recovery rates," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 923-933.
    3. Feldhütter, Peter & Hotchkiss, Edith & Karakaş, Oğuzhan, 2016. "The value of creditor control in corporate bonds," Journal of Financial Economics, Elsevier, vol. 121(1), pages 1-27.
    4. John F. Crean, 2009. "Credit Risk, Default Loss, and the Economics of Bankruptcy," Working Papers tecipa-354, University of Toronto, Department of Economics.
    5. Antill, Samuel & Grenadier, Steven R., 2019. "Optimal capital structure and bankruptcy choice: Dynamic bargaining versus liquidation," Journal of Financial Economics, Elsevier, vol. 133(1), pages 198-224.
    6. Unal, Haluk & Madan, Dilip & Guntay, Levent, 2003. "Pricing the risk of recovery in default with absolute priority rule violation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1001-1025, June.
    7. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    8. Bai, Yan & Zhang, Jing, 2012. "Duration of sovereign debt renegotiation," Journal of International Economics, Elsevier, vol. 86(2), pages 252-268.
    9. Linn, Scott C. & Stock, Duane R., 2005. "The impact of junior debt issuance on senior unsecured debt's risk premiums," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1585-1609, June.
    10. Iraj Hashi, 1995. "The Economics of Bankrupcy, Reorganisation and Liquidation: Lessons for East European Transitional Economies," CASE Network Studies and Analyses 0041, CASE-Center for Social and Economic Research.
    11. Haluk Unal & Dilip Madan & Levent Güntay, 2001. "Pricing the Risk of Recovery in Default with APR Violation," Center for Financial Institutions Working Papers 02-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
    12. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    13. Greg M. Gupton, 2005. "Advancing Loss Given Default Prediction Models: How the Quiet Have Quickened," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(2), pages 185-230, July.
    14. Eberhart, Allan C. & Sweeney, Richard J., 1996. "A note on noise in the market for bankrupt firms' securities," Journal of Banking & Finance, Elsevier, vol. 20(2), pages 401-415, March.

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