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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

Julian Franks

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

Available on ECCH

No

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