Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs
- 1 October 1997
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 10 (4) , 1203-1236
- https://doi.org/10.1093/rfs/10.4.1203
Abstract
This theory can explain why bank debt is universally senior, consistent with the presence of conflict (lawyers) and absolute priority violations in financial distress: Better organized banks would more strongly contest priority in financial distress if they were junior. Because “deterrence” can reduce creditors’ total expenses in a priority contest, the ex post stronger lobbyist/litigant should be senior ex ante. For equivalent reasons, the theory can advise when public debt should be senior to trade credit and/or implicit contracts, and can even suggest one rationale for the absolute priority rule (APR). This article further shows that Chapter 11 creditor reimbursement procedures can lower overall costs.Keywords
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