Political connections, informational asymmetry, and the efficient resolution of financial distress

Madhav S. Aney and Sanjay Banerji

Economic Modelling, 2022, vol. 114, issue C

Abstract: We show that securities issued by a distressed firm, often through exchange offers, provide the most efficient resolution of financial restructuring. Information asymmetry between the firm-bank coalition and small bondholders gives rise to other forms of distress resolution such as refinancing, public workout, and the inefficiency of liquidation. We find that political lobbying by the firm-bank adds to these inefficiencies and inhibits the development of a private market for distressed securities. Cross-country evidence is consistent with this and indicates that improved creditor rights, and the depth of information available to creditors reduce the likelihood of inefficient distress resolution.

Keywords: Bankruptcy; Exchange offers; Political connections; Lobbying; Asymmetric information; D82; G33; G30; K49 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:114:y:2022:i:c:s026499932200147x

DOI: 10.1016/j.econmod.2022.105901

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