Author Information : A. Joseph Warburton (Whitman School of Management, Syracuse University)
Deniz Anginer (Pamplin School of Finance, Virginia Tech)
Year of Publication : Journal of Banking and Finance (2014)
Summary of Findings : The U.S. government's intervention into the 2009 reorganizations of Chrysler and General Motors resulted in a politically-powerful creditor, the auto union, getting paid ahead of other creditors. Some argue that the government re-wrote U.S. bankruptcy law. However, we find no evidence that the bond market interpreted the intervention this way. Instead, evidence suggest that the market saw it as a signal that the government might support other unionized firms should they encounter financial distress.
Research Questions : 1. What are the bond market consequences of political interference in the bankruptcy process?
2. What was the market's reaction to government intervention in Chrysler and GM?
What we know : We find no evidence that bondholders of unionized firms reacted negatively to the government's role in Chrysler and GM. Instead, evidence suggests that the bond market interpreted the intervention as a signal that the government had become willing to assist politically-favored companies such as highly unionized ones.
Novel Findings : Prominent investors such as Warren Buffett charged that the auto bailout distorted creditor priorities in a way that would "disrupt lending practices." We investigate empirically the bond market reaction to the government's role in the Chrysler and GM bankruptcies.
We perform an empirical analysis of the intervention that the TARP Congressional Oversight Panel was unable to perform at the time.
Novel Methodology : We analyze credit spreads and excess returns on bonds of other unionized firms during various stages of the government's involvement in the auto companies.
Implications for Practice : Government intervention in individual bankruptcy cases has the potential to alter creditor perceptions of political and financial risk.
Full Citations : Deniz Anginer and A. Joseph Warburton, The Chrysler Effect: The Impact of Government Intervention on Borrowing Costs, Journal of Banking & Finance 40 (2014) 62–79.
Abstract : This paper studies intercreditor conflict arising from political interference in the bankruptcy process. The U.S. government’s intervention in the 2009 reorganizations of Chrysler and GM purportedly elevated claims of the auto union over those of the automakers’ senior creditors in violation of bankruptcy priority rules. Critics predicted that businesses would experience an increase in their borrowing costs because of the risk that politically-powerful junior claimants might now leap-frog other creditors. We examine the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. We find no evidence that bondholders of unionized firms reacted negatively to the government intervention and reject the claim that investors viewed the reorganizations as establishing a precedent for priority jumping by organized labor.
This study studies “The Chrysler Effect,” and finds no evidence that bondholders of unionized firms reacted negatively to the government intervention.