IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v12y2006i4p333-345.html
   My bibliography  Save this article

Bankruptcy law and financial structure: The impact of managerial incentives

Author

Listed:
  • Ansgar Wohlschlegel

Abstract

Providing the manager of a firm with suitable incentives to act in the investors' interest may be socially efficient, but not individually rational for the investors themselves. This paper specifies a second-best arrangement and shows how investors can be induced to implement it by means of an optimal bankruptcy code in the case where only standard financial contracts are available. It explains why bankruptcy law should, in some states of nature, let shareholders and senior creditors decide jointly, and provides a rationale for the existence of junior debt, which never enjoys any power of decision.

Suggested Citation

  • Ansgar Wohlschlegel, 2006. "Bankruptcy law and financial structure: The impact of managerial incentives," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 333-345.
    • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:333-345
    DOI: 10.1080/13518470500248466
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500248466
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/13518470500248466?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1998. "The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(4), pages 441-464, December.
    2. Berkovitch, Elazar & Israel, Ronen, 1999. "Optimal Bankruptcy Laws across Different Economic Systems," The Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 347-377.
    3. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    4. Berkovitch, Elazar & Israel, Ronen, 1996. "The Design of Internal Control and Capital Structure," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 209-240.
    5. Zender, Jaime F, 1991. "Optimal Financial Instruments," Journal of Finance, American Finance Association, vol. 46(5), pages 1645-1663, December.
    6. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    7. Michelle J. White, 1980. "Public Policy Toward Bankruptcy: Me-First and Other Priority Rules," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 550-564, Autumn.
    8. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1997. "Optimal bankruptcy law and firm-specific investments," European Economic Review, Elsevier, vol. 41(3-5), pages 487-497, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anderson, Ronald W. & Nyborg, Kjell G., 2011. "Financing and corporate growth under repeated moral hazard," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 1-24, January.
    2. Berlin, Mitchell & Mester, Loretta J., 2001. "Lender Liability and Large Investors," Journal of Financial Intermediation, Elsevier, vol. 10(2), pages 108-137, April.
    3. Mitchell Berlin & Loretta J. Mester, 1999. "Financial contracts and the legal treatment of informed investors," Working Papers 99-8, Federal Reserve Bank of Philadelphia.
    4. Dinev, Nikolay, 2017. "Voluntary Bankruptcy as Preemptive Persuasion," Economics Series 334, Institute for Advanced Studies.
    5. M. M. Buehlmaier, Matthias, 2014. "Debt, equity, and information," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 54-62.
    6. Mitchell Berlin & Loretta J. Mester, 2000. "Optimal financial contracts for large investors: the role of lender liability," Working Papers 00-1, Federal Reserve Bank of Philadelphia.
    7. Sumio Hirose, 2009. "Effects of the Bankruptcy Laws Reform on Banks : The examination of recent Japanese experience," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 5(2), pages 201-228, November.
    8. Bebchuk, Lucian Arye, 2001. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," CEPR Discussion Papers 2914, C.E.P.R. Discussion Papers.
    9. Blazy, Régis & Deffains, Bruno & Umbhauer, Gisèle & Weill, Laurent, 2013. "Severe or gentle bankruptcy law: Which impact on investing and financing decisions?," Economic Modelling, Elsevier, vol. 34(C), pages 129-144.
    10. João Pinto & Mário Coutinho dos Santos, 2014. "Corporate Financing Choices after the 2007-2008 Financial Crisis," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.
    11. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
    12. Ernst-Ludwig VON THADDEN & Erik BERGLÖF & Gérard ROLAND, 2003. "Optimal Debt Design and the Role of Bankruptcy," Cahiers de Recherches Economiques du Département d'économie 03.13, Université de Lausanne, Faculté des HEC, Département d’économie.
    13. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    14. Choe, Chongwoo, 2003. "Leverage, volatility and executive stock options," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 591-609, November.
    15. Bigus, Jochen, 2002. "Bankruptcy law, asset substitution problem, and creditor conflicts," International Review of Law and Economics, Elsevier, vol. 22(2), pages 109-132, August.
    16. Radygin Alexandr & Entov Revold & Mejeraoups I., 2007. "External Mechanisms of Corporate Governance," Research Paper Series, Gaidar Institute for Economic Policy, issue 104P.
    17. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
    18. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.
    19. Krainer, Robert E., 2002. "Banking in a theory of the business cycle: a model and critique of the Basle Accord on risk-based capital requirements for banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 413-433, May.
    20. Ambrocio, Gene & Colak, Gonul & Hasan, Iftekhar, 2022. "Commitment or constraint? The effect of loan covenants on merger and acquisition activity," Finance Research Letters, Elsevier, vol. 47(PB).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:333-345. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.