Why is bank debt senior? A theory of asymmetry and claim priority based on influence costs |
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Authors: | Welch I |
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Institution: | Anderson Graduate School of Management at UCLA, 110 Westwood Plaza (C4.16), Los Angeles, CA 9095-1481, USA. E-mail: ivo.welch@anderson.ucla.edu |
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Abstract: | This theory can explain why bank debt is universally senior,consistent with the presence of conflict (lawyers) and absolutepriority violations in financial distress: Better organizedbanks would more strongly contest priority in financial distressif they were junior. Because 'deterrence' can reduce creditors'total expenses in a priority contest, the ex post stronger lobbyist/litigantshould be senior ex ante. For equivalent reasons, the theorycan advise when public debt should be senior to trade creditand/or implicit contrasts, and can even suggest one rationalefor the absolute priority rule (APR). This article further showsthat Chapter 11 creditor reimbursement procedures can loweroverall costs. |
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