We present a model that shows how interactions between creditor groups in bankruptcy can affect the debt issuance decisions of firms. In particular, we suggest that deviations from APR should be priced and can affect the issuing decisions of junior and senior debt. Our model suggests that once firms issue debt with one level of seniority, they may have an incentive to alternate, and subsequent issues may have a different seniority level. When we introduce explicit costs of conflict in our model, we find that as these costs increase, firms will tend to stay with one class of debt. The empirical implications ofour model are consistent with the tendency of firms to alternate the seniority of debt issues, and with the somewhat surprising fact that some firms issue debt at one seniority level only, and quite a few of them never issue any senior debt. Finally, we study a sample of firms in bankruptcy and again find significant relationships between corporate characteristics and the types of debts that they issue, as predicted by the model.

Firms issue securities in sequence. In other words, when a new debt issue hits the market, the firm usually has several other issues outstanding already. The purpose of this paper is to model this sequential issuing process, taking into account a possible conflict between classes of debt with differing priorities should bankruptcy occur. Our theory explains several of the puzzling regularities observed in the issue data. We test some of our propositions using a fixed income database as well as a sample of firms in bankruptcy.