Altman, Edward I. and Allan C. Eberhart.. "Do Seniority Provisions Protect Bondholders' Investments?", Journal of Portfolio Management, Vol. 20, No. 4, (Summer 1994), pp. 67-75.
Introduction: A number of recent studies document that violations of the absolute priority rule (APR) are commonplace and can be of large magnitude. The APR states that senior creditors should be fully compensated before junior creditors receive a payoff, and that junior creditors should be paid in full before shareholders receive any portion of the bankrupt firm's value.
Studies finding that the rule is violated about 75% of the time include Betker [1992b][REF], Eberhart, Moore, Roenfeldt [1990], Eberhart and Sweeney [1992], Fabozzi et al. [1993][REF], Franks and Torous [1989], Hotchkiss [1993][REF], LoPucki and Whitford [1990][REF], Weiss [1990][REF], and White [1989][REF]. All these studies note that the lowest-priority claimants -- i.e., the shareholders -- benefit from APR violations.
Estimates of the percentage of firm value that shareholders receive in violation of the rule range from 2.4% (Betker [1992b][REF]) to 7.6% (Eberhart, Moore, and Roenfeldt [1990]). Junior creditors, though, can be helped or harmed by APR violations.
