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

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  • 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.

Suggested Citation

  • Aney, Madhav S. & Banerji, Sanjay, 2022. "Political connections, informational asymmetry, and the efficient resolution of financial distress," Economic Modelling, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:ecmode:v:114:y:2022:i:c:s026499932200147x
    DOI: 10.1016/j.econmod.2022.105901
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    More about this item

    Keywords

    Bankruptcy; Exchange offers; Political connections; Lobbying; Asymmetric information; D82; G33; G30; K49;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other

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