The Absolute Priority Doctrine in Corporate Reorganizations

Blum, Walter J.; Kaplan, Stanley A.

doi:10.2307/1599095

Cited by 6 publications

(2 citation statements)

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“…This makes them especially well suited for analyzing the impacts of capital structure changes because the firms' asset structures are essentially unaltered. 3 The sample of EOs analyzed in this paper consists of all those which occurred in the U.S. during the period 1963-78 and which satisfied these criteria:…”

Section: Exchange Offer Samplementioning

confidence: 99%

The Impact of Capital Structure Change on Firm Value: Some Estimates

Masulis¹

1983

The Journal of Finance

246

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This study develops a model based on current corporate finance theories which explains stock returns associated with the announcement of issuer exchange offers. The major independent variables are changes in leverage multiplied by senior security claims outstanding and changes in debt tax shields. Parameter estimates are statistically significant and consistent in sign and relative magnitude with model predictions. Overall, 55 percent of the variance in stock announcement period returns is explained. The evidence is consistent with taxbased theories of optimal capital structure, a positive debt level information effect, and leverage-induced wealth transfers across security classes. THERE IS AN EXTENSIVE theoretical literature concerning optimal capital structure.' However, there is little empirical evidence of a relation between changes in capital structure and firm value. In the best known test of an optimal capital structure model, Miller-Modigliani [15] reported evidence of a positive relationship between firm value and leverage which they attributed to a debt tax shield effect. Their results are suspect, however, because of statistical problems they encountered when attempting to adjust for differences in the firms' asset structures. Since only regulated firms were examined, there is also some concern that their empirical findings were caused by the regulatory environment in which these firms operate. No strong evidence of a relation between a firm's value and the size of its debt tax shield has been uncovered since the Miller-Modigliani study.This study estimates the impact of a change in debt level on firm values. Two forms of capital structure change are examined: issuer exchange offers, and recapitalizations. The results indicate that both stock prices and firm values are positively related to changes in debt level and leverage; senior security prices are negatively related to these capital structure change variables. This evidence is consistent with models of optimal capital structure and with the hypothesis that debt level changes release information about changes in firm value. especially Robert Hamada, for their considerable help and encouragement. This is based on a chapter of my dissertation written at the University of Chicago. I have also benefited from the suggestions of the participants in the many finance workshops where this paper was presented. I also wish to thank the many U.S. corporations which voluntarily co-operated in this study. An earlier version of this paper was presented at the Western Finance Association meetings in Jackson Hole in June 1981. I take sole responsibility for any remaining errors. 'See, for example, Modigliani-Miller [16, 17], Kraus-Litzenberger [10], Scott [19], Miller [14], and DeAngelo-Masulis [5].

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Section: Exchange Offer Samplementioning

confidence: 99%

The Impact of Capital Structure Change on Firm Value: Some Estimates

Masulis¹

1983

The Journal of Finance

246

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“…The rule of absolute priority represents the skeleton of past property rights that remains at the moment when the insolvent enterprise's current value must be reallocated to take into account the decline from its previous value. No claimant of a financially distressed entity should receive any consideration for its claim unless and until more senior claims are fully satisfied (Blum and Kaplan 1974).…”

Section: Absolute Priority and Valuation In Reorganisationsmentioning

confidence: 99%

Insolvency Reform and the Indonesian Financial Crisis

Linnan

1999

Bulletin of Indonesian Economic Studies

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Treatments of Indonesia's financial crisis customarily focus on exchange rate collapse, neglecting the question of why enterprises were so highly leveraged beforehand. This article reviews controlling shareholder-debtor behaviour both before and during the crisis. It then examines Indonesia's emergency bankruptcy legislation effective August 1998—which enjoys a mixed record in implementation—and articulates bankruptcy policy principles for the replacement legislation now being drafted. Progress on the insolvency front has been limited to a relatively small number of voluntary debt reorganisations. Early indications are that such restructurings largely take the form of debt rescheduling rather than debt-equity swaps, loan write-offs, or other approaches that would lessen enterprises' heavy leveraging. This outcome reflects problems in creditor as well as debtor preferences. What began as a private sector insolvency problem increasingly overlaps with efforts to address general banking sector difficulties. Further, nationalism questions complicate the resolution of insolvencies.

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Credit Contracts, Collateral-Based Security Agreements, and Bankruptcy

Drukarczyk

1984

Lecture Notes in Economics and Mathematical Systems

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The Absolute Priority Doctrine in Corporate Reorganizations

Cited by 6 publications

References 0 publications

The Impact of Capital Structure Change on Firm Value: Some Estimates

The Impact of Capital Structure Change on Firm Value: Some Estimates

Insolvency Reform and the Indonesian Financial Crisis

Credit Contracts, Collateral-Based Security Agreements, and Bankruptcy

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