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

Aney, Madhav S.; Banerji, Sanjay

Abstract

We show that securities issued by a distressed firm, often through exchange offers, provide the most efficient resolution of financial restructuring. Information asymmetry between the firm-bank coalition and small bondholders gives rise to other forms of distress resolution such as refinancing, public workout, and the inefficiency of liquidation. We find that political lobbying by the firm-bank adds to these inefficiencies and inhibits the development of a private market for distressed securities. Cross-country evidence is consistent with this and indicates that improved creditor rights, and the depth of information available to creditors reduce the likelihood of inefficient distress resolution.

Citation

Aney, M. S., & Banerji, S. (2022). Political connections, informational asymmetry, and the efficient resolution of financial distress. Economic Modelling, 114, Article 105901. https://doi.org/10.1016/j.econmod.2022.105901

• Journal Article Type: Article
• Acceptance Date: May 9, 2022
• Online Publication Date: Jun 2, 2022
• Publication Date: 2022-09
• Deposit Date: Nov 23, 2022
• Publicly Available Date: Nov 24, 2022
• Journal: Economic Modelling
• Print ISSN: 0264-9993
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 114
• Article Number: 105901
• DOI: https://doi.org/10.1016/j.econmod.2022.105901
• Keywords: Economics and Econometrics; Bankruptcy; exchange offers; political connections; lobbying; asymmetric in- formation D82; G33; G30; K49
• Public URL: https://nottingham-repository.worktribe.com/output/14033051
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S026499932200147X?via%3Dihub
• Additional Information: Article Title: Political connections, informational asymmetry, and the efficient resolution of financial distress; Journal Title: Economic Modelling; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.econmod.2022.105901