Misrepresentation and capital structure: Quantifying the impact on corporate debt value

Xinghua Zhou and R. Mark Reesor

Journal of Corporate Finance, 2015, vol. 34, issue C, 293-310

Abstract: Securities class actions typically involve some misrepresentation by a firm that overstates its true value. In securities class actions econometric models are used to assess damages to shareholders. However, studies on measuring damages for debt-holders are limited. Using structural models and leveraging the relationship between equity and firm value, we use observable equity information to determine firm and debt values and hence the effect of misrepresentation on corporate debt values. We find that the misrepresentation impact on debt value depends on the debt's credit risk. Generally, the debt for higher-leverage firms is more sensitive to the misrepresentation impact than for lower-leverage firms and junior debt is more affected by fraud than senior debt. Our proposed methodology allows for debt damages assessments consistent with standard methods for assessing equity damages.

Keywords: Damages; Misrepresentation; Securities class actions; Capital structure; Valuation with observable information (search for similar items in EconPapers)
JEL-codes: G12 G13 G18 G30 G32 K22 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:34:y:2015:i:c:p:293-310

DOI: 10.1016/j.jcorpfin.2015.07.007

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