DO SENIORITY PROVISIONS PROTECT BONDHOLDERS INVESTMENTS

Several studies have documented that violations of the absolute priori ty rule are commonplace, and that the lowest-priority claimants benefi t from violations. This study investigates the efficiency of the marke t for bonds of firms that default and subsequently file for Chapter 11 . While the results suggest that bonds are overpriced at the time of d efault, the results are generally supportive of efficiency. The author s also document the losses bankrupt firms' bondholders experience over the entire life of the bond. They find that bonds with seniority prov isions receive significantly higher payoffs at emergence than subordin ated bonds, providing indirect evidence that the bonds are efficiently priced at issuance.