The bank as Grim Reaper: Debt composition and bankruptcy thresholds

Mark Carey and Michael Gordy

Journal of Financial Economics, 2021, vol. 142, issue 3, 1092-1108

Abstract: We offer a model and evidence showing that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. As predicted by the model, we find that the recovery rate at emergence from bankruptcy on all of the firm’s debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. We further find evidence consistent with a two-threshold model in which private debtholders force default in some cases and shareholders default strategically in others.

Keywords: Credit risk; Recovery rates; Bankruptcy; Debt default (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Working Paper: The Bank as Grim Reaper: Debt Composition and Bankruptcy Thresholds (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:3:p:1092-1108

DOI: 10.1016/j.jfineco.2021.05.048

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