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The Design of Corporate Debt Structure and Bankruptcy

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  • Ernst-Ludwig von Thadden
  • Erik Berglöf
  • Gérard Roland

Abstract

This article integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules are therefore a necessary part of the overall financing contract, to make claims consistent and to prevent a value-reducing run for the assets of the firm. We characterize these rules, with predictions about the allocation of security rights, the right to trigger bankruptcy, and the symmetry of treatment of creditors in default. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhq019
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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 23 (2010)
Issue (Month): 7 (July)
Pages: 2648-2679

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Handle: RePEc:oup:rfinst:v:23:y:2010:i:7:p:2648-2679

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Cited by:
  1. Antoine Martin & David Skeie & Ernst-Ludig von Thadden, 2011. "Repo Runs," FMG Discussion Papers dp687, Financial Markets Group.
  2. Martin, Antoine & Skeie, David & Thadden, Ernst-Ludwig von, 2013. "The Fragility of Short-Term Secured Funding Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 449, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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