THE INFORMATION-CONTENT OF DISTRESSED RESTRUCTURINGS INVOLVING PUBLIC AND PRIVATE DEBT CLAIMS

This paper examines debt restructurings by financially distressed firms. We develop a model which predicts that, in public debt exchange offers, firms with unfavorable private information will offer equity claims to convince bondholders that the firms prospects are poor. In contrast, offering equity to well-informed private lenders conveys favorable private information to outsiders. Consistent with our analysis, we find positive average abnormal returns around restructurings that offer equity to private lenders and senior debt to public debtholders, and we find significant negative average abnormal returns when private lenders are offered senior debt and public lenders are offered equity.