The information content of distressed restructurings involving public and private debt claims

Repeated Dilution of Diffusely Held Debt

“…A debt-forequity swap can be engineered in such a way that it is based on a dilution threat, for example if high cash flow promises are made, which implicitly lower the liquidation value of holdouts. A debt-for-equity swap might also be attractive to signal the poor prospects of the distressed firm, as explained by Brown, James and Mooradian (1993).…”

“…37 Brown, James and Mooradian (1993) report that firms have public debt outstanding in 75 % of the cases where banks increase the collateral level, but only in 27 % of the cases where bank accept equity positions.…”

Debt Restructuring with Multiple Creditors and the Role of Exchange Offers

“…For instance, banks who have a long-term relationship with the debtor are likely to be better informed than public creditors, and in fact, banks appear to play a special role in debt restructuring. Brown et al (1993) find that when senior bank lenders take equity as part of a restructuring plan, positive information about the firm is revealed to the market. In the same vein, James (1993) finds that the better the investment opportunities of the distressed firm, the more likely are senior banks to exchange debt for equity.…”

Distress Risk Premia in Stock and Bond Returns

“…To mitigate this concern, I compare the trading frequency and trading volume between bonds of safe firms and bonds of distressed firms 16 Elton, Gruber, Agrawal, and Mann (2001) and find that distressed bonds are not traded less frequently than safe bonds. 17 Illiquid bonds may have generated extremely high yield spreads and returns. For this reason, I…”