Political connections, informational asymmetry, and the efficient resolution of financial distress

• Main Authors: ANEY, Madhav S., BANERJI, Sanjay
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Bankruptcy; exchange offers; political connections; lobbying; asymmetric information; D82; G33; G30; K49; Finance; Political Economy
• Online Access: https://ink.library.smu.edu.sg/soe_research/2218; https://ink.library.smu.edu.sg/context/soe_research/article/3217/viewcontent/1_s2.0_S026499932200147X_main.pdf
• Institution: Singapore Management University

We show that securities issued by a distressed firm, often through exchange offers, providethe most efficient resolution of financial restructuring. Information asymmetry between thefirm-bank coalition and small bondholders gives rise to other forms of distress resolutionsuch as refinancing, public workout, and the inefficiency of liquidation. We find that politicallobbying by the firm-bank amplifies these inefficiencies and inhibits the development of privatemarket for distressed securities. Cross-country evidence is consistent with this and indicatesthat improved creditor rights, and information facilitating credit bureaus interact in reducingthe likelihood of inefficient distress resolution.