Explaining Deviations from Absolute Priority Rules in Bankruptcy

Abstract

This article provides a classification of the reasons behind deviations from absolute priority (DAPs) in Chapter 11 bankruptcies and tests several explanations using a regression approach. DAPs seem to be best explained by two main reasons, a recontracting process and bargaining power of the debtor. The introduction of nonlinearities in the analysis provides some conditional support for two other reasons—asymmetric information and complexity of the cases. The study found no backing for an alternative reason, the bankruptcy venue. Even though DAPs are present in most Chapter 11 cases, the results show that their magnitude has been decreasing over time.