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Stayin' alive: Debt complexity as a bankruptcy-delaying mechanism

Forssbaeck, Jens LU ; Jankensgård, Håkan and Moursli, Reda LU (2025) In Journal of Corporate Finance 93.
Abstract
A complex and multi-layered liability structure with potentially overlapping claims on underlying collateral reduces expected recovery rates for creditors, which increases their incentives to keep otherwise insolvent firms afloat. Financially distressed firms may therefore seek to strategically “toxify” their capital structure to stave off future bankruptcy. In this article, we find evidence indicating that firms generate more debt complexity as they enter financial distress. Consistent with the idea that it operates as a bankruptcy-delaying mechanism, complexity reduces the probability of bankruptcy for any given level of financial distress.
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author
; and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Debt complexity, Financial distress, Liquidation, Bankruptcy, G32, G33
in
Journal of Corporate Finance
volume
93
article number
102804
publisher
Elsevier
external identifiers
  • scopus:105004309289
ISSN
1872-6313
DOI
10.1016/j.jcorpfin.2025.102804
language
English
LU publication?
yes
id
7de073a5-5d2b-4ba9-885d-bf6089bd83db
date added to LUP
2025-05-06 12:26:12
date last changed
2025-05-22 04:06:11
@article{7de073a5-5d2b-4ba9-885d-bf6089bd83db,
  abstract     = {{A complex and multi-layered liability structure with potentially overlapping claims on underlying collateral reduces expected recovery rates for creditors, which increases their incentives to keep otherwise insolvent firms afloat. Financially distressed firms may therefore seek to strategically “toxify” their capital structure to stave off future bankruptcy. In this article, we find evidence indicating that firms generate more debt complexity as they enter financial distress. Consistent with the idea that it operates as a bankruptcy-delaying mechanism, complexity reduces the probability of bankruptcy for any given level of financial distress.}},
  author       = {{Forssbaeck, Jens and Jankensgård, Håkan and Moursli, Reda}},
  issn         = {{1872-6313}},
  keywords     = {{Debt complexity; Financial distress; Liquidation; Bankruptcy; G32; G33}},
  language     = {{eng}},
  publisher    = {{Elsevier}},
  series       = {{Journal of Corporate Finance}},
  title        = {{Stayin' alive: Debt complexity as a bankruptcy-delaying mechanism}},
  url          = {{http://dx.doi.org/10.1016/j.jcorpfin.2025.102804}},
  doi          = {{10.1016/j.jcorpfin.2025.102804}},
  volume       = {{93}},
  year         = {{2025}},
}