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Bankruptcy Regimes and Gambling on Resurrection

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Author Info
Ondrej Knot
Ondrej Vychodil

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Abstract

This paper analyzes debt contracting in the presence of gambling on resurrection under different bankruptcy regimes. Ex-ante effects on investment levels, interest rates and profit, and ex-post effects on debtor's strategy choices are examined. A model of a debtor-creditor relationship is presented which shows that violation of the Absolute Priority Rule in bankruptcy (soft bankruptcy law) may partially eliminate excessive managerial risk-taking. But under law that is insufficiently soft, this moral hazard problem may be even stronger than under completely tough law. The gambling on resurrection argument for soft law is further weakened if the possibility of verifying the firm's situation by creditors is introduced.

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Publisher Info
Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp290.

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Date of creation: Feb 2006
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Handle: RePEc:cer:papers:wp290

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Related research
Keywords: Corporate bankruptcy; debt contracts; monitoring.;

Find related papers by JEL classification:
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
K39 - Law and Economics - - Other Substantive Areas of Law - - - Other

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This page was last updated on 2009-11-5.

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