In recent years, a number of papers have established a new empirical regularity. Stocks of distressed firms vastly underperform those of financially healthy firms. It is not necessary to attribute the negative excess returns of distressed firms to inefficient or irrational markets. We show that...

This paper examines the impact of stock liquidity on firm bankruptcy risk. Using the Securities and Exchange Commission decimalization regulation as a shock to stock liquidity, we establish that enhanced liquidity decreases default risk. Stocks with the highest default risk experience the...

We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of...

We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy...

We develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the U.S. bankruptcy procedure (known as Chapter 11). Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote....

Creditors are increasingly transferring debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that such debt decoupling causes large adverse effects on firms whose shareholders have high...

In the recent theoretical literature on lending risk, the coordination problem in multi-creditor relationships have been analyzed extensively. We address this topic empirically, relying on a unique panel data set that includes detailed credit-file information on distressed lending relationships...

I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Theoretically, I show that if bondholders are insured with CDSs, the participation rate in a restructuring decreases. Using a sample of distressed exchange offers, I estimate that the participation rate...

We analyze the impact of credit default swaps (CDS) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access to CDS contracts that hedge them against...

We quantify the differences between market and regulatory assessments of bank portfolio risk, showing that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.1% following a one standard deviation increase in...