Author： Longhofer S.D.
Publisher： Academic Press
ISSN： 1042-9573
Source： Journal of Financial Intermediation, Vol.6, Iss.3, 1997-07, pp. : 249-267
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Abstract
Violations of the absolute priority rule (APR) are commonplace in private workouts, formal business reorganizations, and personal bankruptcies. While some theorists suggest they may arise endogenously, they are clearly magnified by the institutional structure of the bankruptcy code. This paper shows that APR violations exacerbate credit rationing problems by reducing the payment lenders receive in default states. Furthermore, APR violations make default more likely to occur, thereby making debt financing more costly. Together, these results support the view that APR violations create an impediment to efficient financial contracting. Journal of Economic Literature Classification Numbers: G33, G38, K20. Copyright 1997 Academic Press.
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