A note on noise in the market for bankrupt firms' securities

A model used to determine the impact of absolute priority rule (APR) violations on security price noise is introduced. A group of researchers call for the prohibition of APR violations because of their tendency to increase uncertainty to the process of security valuation. However, another group favors APR violations to minimize inefficient liquidations. Results show that APR violations significantly increase noise and failure to consider their impact can result in a suboptimal design.