Work

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

Year: 2025

Type: article

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.

Source: Journal of Corporate Finance

DOI: 10.1016/j.jcorpfin.2025.102804

Authors: Jens Forssbæck, Håkan Jankensgård, Reda Moursli

Institutions: Lund University, Stockholm University

Language: English

Topic: Corporate Insolvency and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,140

Funder: Jan Wallanders och Tom Hedelius Stiftelse samt Tore Browaldhs Stiftelse