CEF.UP – FIN Seminar/Webinar

Thursday – January 18^th, 2024 at 1:00 p.m. | Room 305| Online

“Do Specialized Distress Investors Undermine Upstream Lending?” (joint work with Irem Demirci and Miguel Oliveira)

Fernando Anjos – Nova School of Business and Economics, Universidade Nova de Lisboa

Abstract:

“A growing class of investors specializes in funding distressed firms. Specialization allows these investors to develop valuable expertise, which in principle can contribute to overall economic efficiency. Notwithstanding this argument, we show that specialized distress investors (SDIs) can inadvertently worsen borrower moral hazard, since these downstream financiers rescue firms after poor performance (bailout effect). Moreover, SDI presence can make upstream lenders develop a counter-intuitive preference towards projects with lower continuation value and/or worse agency problems, in order to reduce SDI entry. In contrast to these results, we show that from a longer-run perspective SDIs can actually help in managing borrower moral hazard. This occurs in the model when SDI entry makes it easier for upstream lenders to sustain a reputation of toughness, which can in turn be critical for disciplining borrowers.”