Does the Bond Market Predict Bankruptcy Settlements?

Allan C Eberhart and Richard J Sweeney

Journal of Finance, 1992, vol. 47, issue 3, 943-80

Abstract: This study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded (i.e., usually junior claimants) bondholders. The data indicate that, on average, bondholders benefit, albeit slightly, from absolute priority rule violations. This paper also examines the degree to which the bond market, in the bankruptcy filing month, anticipates departures from the absolute priority rule and other influences on the payoff to bondholders. In other words, the authors investigate the informational efficiency of the market for bankrupt bonds. Overall, despite the complex and lengthy nature of bankruptcy proceedings, the results support efficiency. Copyright 1992 by American Finance Association.

Date: 1992
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