Recent Bankruptcy Finance-Related Articles of Interest Available for Downloading from SSRN

The following finance bankruptcy-related papers, arranged by abstract ID number, can be downloaded from the Social Science Research Network:

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Univ. of Pennsylvania Law School's David A. Skeel, Jr. and Univ. of San Diego School of Law's Frank Partnoy: "The Promise and Perils of Credit Derivatives." (Abstract ID: 929747)

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Harvard University's John Y. Campbell, Brandeis University's Jens Hilscher, and Duquesne Capital Management LLC's Jan Szilagyi: "In Search of Distress Risk." (Abstract ID: 917567)

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Arizona State University's Michael G. Hertzel and Zhi Li, USC's Micah S. Officer, and NYU's Kimberly J. Rodgers: "Inter-Firm Linkages and the Wealth Effects of Financial Distress along the Supply Chain." (Abstract ID: 912795)

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Matthias Hild and Jordan Mitchell: "Qwest Communications Bond-Swap Offer: Explanatory Note." (Abstract ID: 912128)

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Abstracts for each of these papers follows:

 

David A. Skeel, Jr. and Frank Partnoy, "The Promise and Perils of Credit Derivatives." (Abstract ID: 929747):

In this Article, we begin what we believe will be a fruitful area of scholarly inquiry: an in-depth analysis of credit derivatives. We survey the benefits and risks of credit derivatives, particularly as the use of these instruments affect the role of banks and other creditors in corporate governance. We also hope to create a framework for a more general scholarly discussion of credit derivatives.

We define credit derivatives as financial instruments whose payoffs are linked in some way to a change in credit quality of an issuer or issuers. Our research suggests that there are two major categories of credit derivative. First, a credit default swap is a private contract in which private parties bet on a debt issuer's bankruptcy, default, or restructuring. For example, a bank that has loaned $10 million to a company might enter into a $10 million credit default swap with a third party for hedging purposes. If the company defaults on its debt, the bank will lose money on the loan, but make money on the swap; conversely, if the company does not default, the bank will make a payment to the third party, reducing its profits on the loan.

Second, a collateralized debt obligation (CDO) is a pool of debt contracts housed within a special purpose entity (SPE) whose capital structure is sliced and resold based on differences in credit quality. In a cash flow CDO, the SPE purchases a portfolio of outstanding debt issued by a range of companies, and finances its purchase by issuing its own financial instruments, including primarily debt but also equity. In a synthetic CDO, the SPE does not purchase actual bonds, but instead enters into several credit default swaps with a third party, to create synthetic exposure to the outstanding debt issued by a range of companies. The SPE finances its purchase by issuing financial instruments to investors, but these instruments are backed by credit default swaps rather than any actual bonds.

In the Article's first substantive part, we discuss the benefits associated with both types of credit derivatives, which include increased opportunities for hedging, increased liquidity, reduced transaction costs, and a deeper and potentially more efficient market for trading credit risk. We then discuss the risks associated with credit derivatives, such as moral hazard and other incentive problems, limited disclosure, potential systemic risk, high transaction costs, and the mispricing of credit. After considering the benefits and risks, we discuss some of the implications of our findings, and make some preliminary recommendations. In particular, we focus on the issues of disclosure, regulatory licenses associated with credit ratings, and the special treatment of derivatives in bankruptcy.

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John Y. Campbell, Jens Hilscher, and Jan Szilagyi, "In Search of Distress Risk." (Abstract ID: 917567):

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

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Michael G. Hertzel, Zhi Li, Micah S. Officer, and Kimberly J. Rodgers, "Inter-Firm Linkages and the Wealth Effects of Financial Distress along the Supply Chain." (Abstract ID: 912795):

Extant research examines the extent to which bankruptcy effects are contagious within industries. This study broadens the investigation by examining the wealth effects of distress on customers and suppliers. On average, important contagion effects occur prior to and at bankruptcy filings and extend beyond industry competitors along the supply chain. Specifically, distress related to bankruptcy filings is associated with negative and significant stock price effects for rivals, customers and suppliers. Consistent with expectations, customer and supplier effects are more negative when industry contagion is more severe. We provide evidence on the importance of industry structure, specialized product nature, and leverage on supply chain effects.

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Matthias Hild and Jordan Mitchell, "Qwest Communications Bond-Swap Offer: Explanatory Note." (Abstract ID: 912128):

This note explains relevant aspects of bankruptcy proceedings and the "rule of absolute priority" in the context of the case "Qwest Communications: Bond-Swap Offer (A)" (UVA-QA-0647). It is intended to assist students without sufficient knowledge of the U.S. Bankruptcy Code in their calculations of the financial implications of the exchange offer.

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Special thanks to the folks at ssrn.com, who suggested we let people know of the following policies and procedures in respect of downloading papers from SSRN:

Anyone new to our system who clicks on the link to purchase the paper will be first asked to register their e-mail address on our system. This is something that is required before one can download. The registration is just a security feature and doesn't cost anything, nor will the e-mail address be used for any other purpose but for our system to be able to recognize the user in his use of our services.

Thanks also to our firm's law clerk and full-time Northwestern U. student DeJohn Allen for helping assemble this post.

© Steve Jakubowski 2006