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The Chrysler effect : the impact of the Chrysler bailout on borrowing costs

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  • Anginer, Deniz
  • Warburton, A. Joseph

Abstract

Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market wherethis effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.

Suggested Citation

  • Anginer, Deniz & Warburton, A. Joseph, 2010. "The Chrysler effect : the impact of the Chrysler bailout on borrowing costs," Policy Research Working Paper Series 5462, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5462
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    References listed on IDEAS

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    Cited by:

    1. Michele Tronconi, 2014. "Dalla prudenza alla crescita. Perché e come diversificare la previdenza sociale," LIUC Papers in Economics 276, Cattaneo University (LIUC).
    2. Gara M. dup Afonso & João A. C. Santos & James Traina, 2014. "Do \\"Too-Big-to-Fail\\" banks take on more risk?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 41-58.

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    More about this item

    Keywords

    Debt Markets; Bankruptcy and Resolution of Financial Distress; Emerging Markets; Deposit Insurance; Access to Finance;
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