Corporate bankruptcy, private creditors, and the market for corporate control

We assess valuation effects on creditors holding the private debt of client firms that file for Chapter 11 bankruptcy, and disaggregate the results by type of private creditor, form of bankruptcy resolution, and subsequent control bid activity. Among private creditors holding unsecured claims, losses are consistently more severe for trade creditors than for bank creditors. These losses are mitigated for cases in which petitioning firms subsequently reorganize and become targets of control bids during the Chapter 11 process. Banks holding secured claims sustain zero excess returns regardless of the type of bankruptcy resolution or subsequent control activity. Our results support the view that bank loans are effectively senior debt and that banks have a key role in continuation/liquidation decisions. Moreover, we find that control bids for firms in Chapter 11 are common and generate significant gains to equityholders of firms in Chapter 11 and to bidders, so that corporate control activity is an important element in the bankruptcy process.