Evidence suggests that asset pledgeability, debt complexity, and control rights of dispersed debt influence financial distress resolution. We model how courts’ imperfect verifiability of assets and valuable control of misaligned creditors shape firms’ debt structure and create coordination problems that determine distress outcomes and financing. A key result is that an increase in verifiability allows financially constrained firms to fund projects by pledging more assets to misaligned creditors, making contract renegotiation in distress times more difficult and increasing the probability of bankruptcy. Since equity receives less in the event of distress, constrained firms choose riskier projects with higher returns. Consistent with our model, bankruptcy filings increase after the U.S. Supreme Court decision imposing a “market test” to assess the value of stockholders’ interest in debtor proposals. The effect is stronger for firms with low asset verifiability. These firms also experienced an increase in recovery rates, debt capacity, and risk-taking. Our findings suggest that reforms improving the verifiability of assets substantially impact credit access. However, our results also point out that improving asset verifiability may be insufficient for constrained firms with aligned creditors. Therefore, complementary reforms that facilitate firms’ access to creditors from different market segments may be necessary.

The classic view assumes banks prioritize immediate repayment by selling assets until default. We endogenize run frequency and study how general settlement rules trade off liquidity provision net of fire sale losses against induced run incentives. Panic runs are eliminated when all illiquid assets are sold under orderly resolution, but liquidity provision in a run is minimal. When suspension after some fire sales is followed by immediate liquidation, run frequency falls then rises in suspension delay. Thus, optimal suspension may require some sale of illiquid assets, in contrast to MMF norms. Ex post discretion induces excessive liquidation and more frequent runs. (JEL D8, G21)

We study how renegotiation frictions impact distressed debt resolution and ex-ante financial contracting. We do so by exploiting an event that exogenously reduced the costs that syndicated lenders incur when renegotiating debt out of court, without affecting in-court restructuring costs (IRS Regulation TD9599). CDS contracts insure creditors against in-court bankruptcy losses and CDS spreads reflect the shadow price of bankruptcy risk. Using a triple-differences approach, we show that CDS spreads fell by record figures on the event’s announcement, with declines concentrated among distressed firms that relied most on syndicated loans. Distressed firms’ loan renegotiation rates more than doubled, as banks agreed to extend loan maturities in exchange for higher interest payments. Those firms’ access to new syndicated loans increased while associated interest markups declined.

We model and analyze the interplay of capital structure and labor union reversible bargaining tools (such as union-sponsored shareholder proposals). Unions counter firms’ ex-post strategic use of debt by employing bargaining tools that can be reversed depending on firm performance. Firms adjust debt ex ante to make underinvestment a credible threat if the bargaining tools are not reversed. The use of reversible bargaining tools is negatively affected by debt, decreases for riskier firms when the state of the economy is low, and reduces the profits of safer firms. Consistently, we find that union-sponsored shareholder proposals are negatively related to leverage, decrease for riskier firms during the 2008–2009 financial crisis, and are negatively associated with the profitability of safer firms.

We develop a model in which feedback effects from equity markets allow uninformed traders to profit by short selling a firm’s stock while going long on its product market competitor. As this strategy distorts the investment of the firm targeted by short selling to the benefit of its rival, we label it predation by stock price manipulation . A short selling ban does not prevent manipulation since the speculator can still induce a firm to underinvest by establishing a long position in its rival. Our analysis unveils how competitive interactions among firms expand the scope of manipulation, providing new insights into equity markets and short sales regulation.

We develop a new rationale for capital allocation in business groups’ internal capital markets. We show that productivity and pledgeable income jointly drive capital allocation within an internal capital market. In financially constrained business groups, an efficient internal capital market can allocate marginal funds to firms that have high pledgeability of income because of a multiplier effect: a dollar of internal funds generates a bigger increase in investment. This result has important implications for the business group affiliation strategy. Whether or not a financially constrained but highly productive firm will benefit from group affiliation depends on its borrowing capacity vis-à-vis other affiliates.

We empirically investigate how short selling affects firms’ product market performance via a managerial monitoring channel. Using both historical data and exogenous shocks to short selling, we find robust evidence that short interest negatively impacts market shares, especially in large firms. Our Reg SHO results are stronger in concentrated industries and industries where firms compete in strategic substitutes. Further tests show that these effects are driven by low ex-ante stock price informativeness. The evidence suggests that the interaction between market power and price opacity generates incentives for overproduction, which short selling attenuates. Our results support policies that facilitate price discovery in the presence of market power.