I examine the determinants of equity's absolute priority deviation in 75 bankruptices. Previous research emphasizes the shareholders' option to delay a reorganization. In practice, managers control this option, and agency problems between managers and shareholders can be severe in bankruptcy. Equity's bargaining power should depend on managers' incentives and creditor control over managers. Empirical evidence indicates that priority deviations are larger when the firm is closer to solvency, banks hold fewer claims, the chief executive officer (CEO) holds more shares, CEO pay and shareholder wealth are positively related, and the firm retains the exclusive right to propose a bankruptcy plan.
