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Misrepresentation and capital structure: Quantifying the impact on corporate debt value

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  • Zhou, Xinghua
  • Reesor, R. Mark

Abstract

Securities class actions typically involve some misrepresentation by a firm that overstates its true value. In securities class actions econometric models are used to assess damages to shareholders. However, studies on measuring damages for debt-holders are limited. Using structural models and leveraging the relationship between equity and firm value, we use observable equity information to determine firm and debt values and hence the effect of misrepresentation on corporate debt values. We find that the misrepresentation impact on debt value depends on the debt's credit risk. Generally, the debt for higher-leverage firms is more sensitive to the misrepresentation impact than for lower-leverage firms and junior debt is more affected by fraud than senior debt. Our proposed methodology allows for debt damages assessments consistent with standard methods for assessing equity damages.

Suggested Citation

  • Zhou, Xinghua & Reesor, R. Mark, 2015. "Misrepresentation and capital structure: Quantifying the impact on corporate debt value," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 293-310.
    • Handle: RePEc:eee:corfin:v:34:y:2015:i:c:p:293-310
    DOI: 10.1016/j.jcorpfin.2015.07.007
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    References listed on IDEAS

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    Cited by:

    1. Cumming, Douglas & Dannhauser, Robert & Johan, Sofia, 2015. "Financial market misconduct and agency conflicts: A synthesis and future directions," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 150-168.
    2. Guangming Gong & Xin Huang & Sirui Wu & Haowen Tian & Wanjin Li, 2021. "Punishment by Securities Regulators, Corporate Social Responsibility and the Cost of Debt," Journal of Business Ethics, Springer, vol. 171(2), pages 337-356, June.
    3. Douglas Cumming & Sofia Johan & Denis Schweizer, 2017. "Information systems, agency problems, and fraud," Information Systems Frontiers, Springer, vol. 19(3), pages 421-424, June.
    4. Ionel Jianu & Iulia Jianu, 2018. "The Share Price and Investment: Current Footprints for Future Oil and Gas Industry Performance," Energies, MDPI, vol. 11(2), pages 1-15, February.
    5. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "Exchange trading rules, surveillance and suspected insider trading," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 311-330.

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    More about this item

    Keywords

    Damages; Misrepresentation; Securities class actions; Capital structure; Valuation with observable information;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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