Conflicts In Bankruptcy And The Sequence Of Debt Issues
Source: University of Pennsylvania
The authors present a model that shows how interactions between creditor groups in bankruptcy can affect the debt issuance decisions of firms. In particular, they suggest that deviations from APR should be priced and can affect the issuing decisions of junior and senior debt. Their model suggests that once firms issue debt with one level of seniority, they may have an incentive to alternate, and subsequent issues may have a different seniority level. When they introduce explicit costs of conflict in their model, they find that as these costs increase, firms will tend to stay with one class of debt.