THE INFORMATION-CONTENT OF DISTRESSED RESTRUCTURINGS INVOLVING PUBLICAND PRIVATE DEBT CLAIMS

This paper examines debt restructurings by financially distressed firm s. We develop a model which predicts that, in public debt exchange off ers, firms with unfavorable private information will offer equity clai ms to convince bondholders that the firms prospects are poor. In contr ast, offering equity to well-informed private lenders conveys favorabl e private information to outsiders. Consistent with our analysis, we f ind 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 len ders are offered senior debt and public lenders are offered equity.