Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?

Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?

Cem Demiroglu, Julian Franks, Ryan Lewis

Series number :

Serial Number: 
655/2020

Date posted :

February 14 2020

Last revised :

February 14 2020
SSRN Share

Keywords

  • Bankruptcy • 
  • Chapter 11 • 
  • Court Misvaluation • 
  • DAP Violations • 
  • TRACE • 
  • Wealth Transfer • 
  • Transparency • 
  • Bond • 
  • Dissemination

Past studies document large court valuation errors in Chapter 11 bankruptcy, which are often attributed to the lack of transparent market prices of the debtor’s securities.

We document that the introduction of mandated public dissemination of over-the-counter corporate bond transactions through the TRACE platform has substantially reduced those misvaluations and virtually eliminated large wealth transfers between different claimants. The effects of dissemination are most pronounced for firms with fulcrum securities, which are actively traded around the court valuation dates and which receive a large proportion of the post-emergence equity; dissemination has no impact when prices are stale.
 

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Authors

Real name:
Cem Demiroglu
Real name:
Ryan Lewis