The seminar will be held in the Visitor Centre at 3 pm.
Michael Gordy
(Federal Reserve Board of Governors)
Abstract
We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm’s debt is related to the pre-bankruptcy share of private debt in all of the firm’s debt. Empirical evidence supports this implication. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together. This special role of private debt in the capital structure has important implications for pricing models and risk management. Keywords: credit risk, recovery rates, bankruptcy, debt default
JEL Codes: G12, G33, G32