Chapter 11, Private Workouts and Corporate Debt Pricing under Asymmetric Information

2003 ◽  
Author(s):  
Nan Chen
Keyword(s):  
Asymmetric Information ◽  
Corporate Debt ◽  
Debt Pricing

The Impact of Auditor-Related Tax Services on Corporate Debt Pricing

2008 ◽  
Vol 30 (2) ◽  
pp. 79-106 ◽  
Author(s):  
Steve Fortin ◽  
Jeffrey A. Pittman
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
Policy Implications ◽  
Corporate Debt ◽  
Security Level ◽  
Firm Level ◽  
Yield Spreads ◽  
Public Firms ◽  
Debt Pricing ◽  
The Impact

ABSTRACT: We examine the link between auditor-related tax services and corporate debt pricing. After controlling for security-level and other firm-level determinants, we provide strong, robust evidence that bondholders reward public firms that pay proportionately more tax fees to their auditor with lower yield spreads. Our results include that the influence of auditor-related tax services on lowering borrowing costs is stronger for issues made by firms suffering worse information asymmetry. This research, which helps to resolve whether audit quality hinges on the relative amount of tax services, may have important policy implications given that regulators continue to debate whether to impose further restrictions on the tax services that auditors can provide to their clients. Altogether, our evidence implies that the benefit of tax services in improving auditor knowledge—stemming from public accounting firms learning more about their clients over successive engagements—outweighs any concurrent sacrifice in auditor independence in shaping debt market perceptions.

A Binomial Lattice Method for Pricing Corporate Debt and Modeling Chapter 11 Proceedings

2007 ◽  
Vol 42 (2) ◽  
pp. 279-312 ◽  
Author(s):  
Mark Broadie ◽  
Özgür Kaya
Keyword(s):  
Closed Form ◽  
Closed Form Solution ◽  
Structural Models ◽  
Limited Liability ◽  
Complex Model ◽  
Form Solution ◽  
Corporate Debt ◽  
Lattice Method ◽  
Binomial Lattice

AbstractThe pricing of corporate debt is still a challenging and active research area in corporate finance. Starting with Merton (1974), many authors proposed a structural approach in which the value of the assets of the firm is modeled by a stochastic process, and all other variables are derived from this basic process. These structural models have become more complex over time in order to capture more realistic aspects of bankruptcy proceedings. The literature in this area emphasizes closed-form solutions that are derived by either partial differential equation methods or analytical pricing techniques. However, it is not always possible to build a comprehensive model with realistic model features and achieve a closed-form solution at the same time. In this paper, we develop a binomial lattice method that can be used to handle complex structural models such as ones that include Chapter 11 proceedings of the U.S. bankruptcy code. Although lattice methods have been widely used in the option pricing literature, they are relatively new in corporate debt pricing. In particular, the limited liability requirement of the equity holders needs to be handled carefully in this context. Our method can be used to solve the Leland (1994) model and its extension to the finite maturity case, the more complex model of Broadie, Chernov, and Sundaresan (2007), and others.

Using Innovative Securities under Asymmetric Information: Why Do Some Firms Pay with Contingent Value Rights?

2008 ◽  
Vol 43 (4) ◽  
pp. 1001-1035 ◽  
Author(s):  
Sris Chatterjee ◽  
An Yan
Keyword(s):  
Asymmetric Information ◽  
Stock Return ◽  
Intrinsic Value ◽  
Theoretical Explanation ◽  
Share Price ◽  
Reference Level ◽  
Put Option ◽  
Firm Type ◽  
Information Problem

AbstractThis paper provides the first theoretical explanation and the first empirical analysis of contingent value rights (CVRs), which have been used as a means of payment in acquisitions, exchange offers, debt restructurings, Chapter 11 reorganizations, and lawsuit settlements. A CVR is a put option committing to pay additional cash or securities to CVR holders, contingent on the issuer's share price falling below a prespecified reference level. In this paper, we develop a model to show that CVRs can help a higher-intrinsic-value firm to reveal its firm type when the firm faces an asymmetric information problem. Our model predicts that i) when CVRs are offered along with cash or stock, the announcement period abnormal stock return is greater than that in stock offers, ii) firms facing more severe asymmetric information problems are more likely to offer CVRs to signal their firm type, and iii) firms that are relatively more cash-constrained are more likely to offer CVRs rather than cash. We test all three predictions using a sample of mergers and acquisitions. Our empirical results are consistent with the predictions of the model.

Pricing corporate debt with finite maturity and chapter 11 proceedings

2013 ◽  
Vol 13 (12) ◽  
pp. 1855-1861 ◽  
Author(s):  
Min Dai ◽  
Lishang Jiang ◽  
Jianwei Lin
Keyword(s):  
Corporate Debt

Bankruptcy Section 363 Sales: Choices and Consequences

2012 ◽  
Vol 02 (04) ◽  
pp. 1250016
Author(s):  
Dror Parnes
Keyword(s):  
Growth Rate ◽  
Asymmetric Information ◽  
Financial Institutions ◽  
Information Support ◽  
Coordination Problem ◽  
Potential Growth ◽  
Coordination Problems ◽  
Financial Firms

We contrast bankruptcy Section 363 Sales with the traditional path of Chapter 11 reorganization and find that among financial institutions, higher measures of creditors' coordination problems favor the Chapter 11 path, while greater profitability, available cash, asymmetric information between shareholders and creditors, and potential growth rate support the choice of 363 Sales. Among the non-financial firms, higher measures of creditors' coordination problem and available cash favor the course of Chapter 11, while greater profitability, liquidity, and asymmetric information support the path of 363 Sales. We further detect that bankruptcy Section 363 Sales exhibits lower direct fees, and it lasts significantly less time than formal Chapter 11 before the final emergence.

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