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Contractual Resolutions of Financial Distress

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  • Nicola Gennaioli
  • Stefano Rossi

Abstract

In a financial contracting model, we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes co-exist – one class fully concentrated and with control rights upon default, the other dispersed and without control rights – removes the controlling creditor’s liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. Our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 651.

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Date of creation: May 2012
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Handle: RePEc:bge:wpaper:651

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Keywords: Financial Distress; Investor Protection; Financial Contracting;

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Citations

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Cited by:
  1. Nicola Gennaioli & Enrico Perotti & Giacomo Ponzetto, 2013. "Standardized Enforcement: Access to Justice vs. Contractual Innovation," Working Papers 747, Barcelona Graduate School of Economics.
  2. Cerqueiro, G.M. & Ongena, S. & Roszbach, K., 2011. "Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment," Discussion Paper 2011-087, Tilburg University, Center for Economic Research.
  3. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2013. "Are there alternatives to bankruptcy? a study of small business distress in Spain," Banco de Espa�a Working Papers 1315, Banco de Espa�a.
  4. Claude Fluet & Paolo G. Garella, 2013. "Debt Rescheduling with Multiple Lenders: Relying on the Information of Others," Cahiers de recherche 1332, CIRPEE.

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