Do market prices improve the accuracy of court valuations in Chapter 11?
Subject
Finance
Publishing details
Social Sciences Research Network
Authors / Editors
Demiroglu C; Franks J; Lewis R
Biographies
Publication Year
2016
Abstract
This paper shows that public dissemination of trading information for registered corporate bonds reduces valuation errors in Chapter 11 bankruptcy reorganizations by about half, virtually eliminating unintended wealth transfers between claimants and consequent violations of the absolute priority rule. The impact of dissemination is significantly greater where alternative market-based indicators of firm valuation, such as analyst estimates or outside bids for the company's assets are lacking, and significantly lower where hedge funds are among the debtor’s largest unsecured claimants. The results suggest that the transparency of market prices helps improve the distributional efficiency of Chapter 11 bankruptcy and provide support for proposals to increase the availability of market-based signals to aid the valuation process.
Keywords
Bankruptcy; Chapter 11; TRACE; Transparency; Bond; Dissemination
Series
Social Sciences Research Network