Working Paper
The Bank as Grim Reaper : Debt Composition and Bankruptcy Thresholds
Abstract: We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. Empirical evidence supports this and other implications of the model. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together.
Keywords: Bankruptcy; Credit risk; Debt default; recovery rates;
JEL Classification: G12; G33; G32;
https://doi.org/10.17016/FEDS.2016.069
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File(s): File format is application/pdf http://www.federalreserve.gov/econresdata/feds/2016/files/2016069pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2016-07-06
Number: 2016-069
Pages: 53 pages