Reputation and the Market for Distressed Firm Debt

by Thomas H. Noe of Tulane University, and
Michael J. Rebello of Georgia State University

September 2003

Abstract: Our analysis explains how vulture investors (vultures) can maintain and exploit their reputations for toughness. Vultures leverage their reputations to extract concessions from stockholders in debt restructurings. To profit from these concessions, vultures must first acquire debt from incumbent bondholders. Buying only the tranches most likely to render them marginal creditors maximizes vulture leverage in debt-purchase negotiations. Vulture profits are proportional to the degree of uncertainty regarding the identity of the marginal debt class.

JEL Classification: G29, G33.

Previously titled: Feasting on a Corporate Carcass: Bluffing, Bondmail, and Reputation in the Market for Distressed-Firm Debt

Published in: Journal of Financial and Quantitative Analysis, Vol. 38, No. 3, (September 2003), pp. 503-521.

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