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Vulture funds and the fresh start accounting value of firms emerging from bankruptcy
Author(s) -
Gietzmann Miles,
Isidro Helena,
Raonic Ivana
Publication year - 2018
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12303
Subject(s) - bankruptcy , business , valuation (finance) , vulture , loan , debt , fresh start , finance , hedge fund , accounting , monetary economics , economics , biology , ecology , keynesian economics
We study how distress‐oriented hedge funds (vulture funds) play an important role in the fresh start valuation of firms emerging from Chapter 11 reorganization. We find that loan‐to‐own vultures acquire debt positions of the distressed firm that grant dominant power in the bankruptcy negotiations, and they then use the discretion allowed by fresh start accounting to introduce valuation bias in their favor. We show that the strategic influence over fresh start values can create opportunities to increase vulture investors’ returns at the expense of other claim holders.