Ownership structure and bankruptcy: An explanation for deviations from absolute priority.
Item
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Title
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Ownership structure and bankruptcy: An explanation for deviations from absolute priority.
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Identifier
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AAI3008853
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identifier
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3008853
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Creator
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Naples Layish, Dina Marie.
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Contributor
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Adviser: Linda Allen
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Date
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2001
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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Financial distress alters the incentives of managers, who may be more interested in saving their careers than in maximizing firm value and, thus, may take actions for their own benefit, not for the benefit of the firm. The current bankruptcy code gives managers exclusive control of a firm during the first four months after filing for bankruptcy, thereby exacerbating the agency problems within a financially distressed firm. One way to alleviate the agency costs of financial distress may be to offer management a financial interest in the reorganized firm through deviations from absolute priority.;This paper develops a theoretical model that explains the existence of deviations from absolute priority as a means to resolve the agency problems in bankrupt firms. Bondholders utilize deviations from absolute priority in order to induce managers, who are also shareholders, to take actions that will maximize the value of the firm. Empirical tests of the model indicate that deviations from absolute priority are positively related to ownership structure. Specifically, the reorganization plans of firms in which insiders hold more of the outstanding common stock more often include distributions to equity holders. The reorganization is also affected by shareholder concentration. Firms in which managers and outside shareholders are disperse have a higher probability of deviations from absolute priority. These firms must provide managers with a strong incentive to preserve firm value during the bankruptcy proceedings. A switching regressions model is used to define "high" and "low" equity holdings for both insiders and outside block holders. Deviations from absolute priority are also directly related to the level of free cash flow within the firm and the solvency level of the firm. The results of this study show that deviations from absolute priority can be explained as a method of ensuring that managers do not destroy value during reorganization.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
