The Chrysler Effect : The Impact of the Chrysler Bailout on Borrowing Costs
Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other credi...
Main Authors: | , |
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Format: | Policy Research Working Paper |
Language: | English |
Published: |
2012
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Subjects: | |
Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101028130336 http://hdl.handle.net/10986/3943 |
Summary: | Did the U.S. government's
intervention in the Chrysler reorganization overturn
bankruptcy law? Critics argue that the government-sponsored
reorganization impermissibly elevated claims of the auto
union over those of Chrysler's other creditors. If the
critics are correct, businesses might suffer an increase in
their cost of debt because creditors will perceive a new
risk, that organized labor might leap-frog them in
bankruptcy. This paper examines the financial market where
this effect would be most detectible, the market for bonds
of highly unionized companies. The authors find no evidence
of a negative reaction to the Chrysler bailout by
bondholders of unionized firms. They thus reject the notion
that investors perceived a distortion of bankruptcy
priorities. To the contrary, bondholders of unionized firms
reacted positively to the Chrysler bailout. This evidence
suggests that bondholders interpreted the Chrysler bailout
as a signal that the government will stand behind unionized
firms. The results are consistent with the notion that
too-big-to-fail government policies generate moral hazard in
the credit markets. |
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