Stayin' alive: Debt complexity as a bankruptcy-delaying mechanism

A complex and multi-layered liability structure with potentially overlapping claims on underlying collateral reduces expected recovery rates for creditors, which increases their incentives to keep otherwise insolvent firms afloat. Financially distressed firms may therefore seek to strategically “toxify” their capital structure to stave off future bankruptcy. In this article, we find evidence indicating that firms generate more debt complexity as they enter financial distress. Consistent with the idea that it operates as a bankruptcy-delaying mechanism, complexity reduces the probability of bankruptcy for any given level of financial distress.