Bankruptcy Regimes and Gambling on Resurrection
AbstractThis 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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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp290.
Date of creation: Feb 2006
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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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-25 (All new papers)
- NEP-FIN-2006-03-25 (Finance)
- NEP-FMK-2006-03-25 (Financial Markets)
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- Agliardi, Elettra & Andergassen, Rainer, 2009.
"Last resort gambles, risky debt and liquidation policy,"
Review of Financial Economics,
Elsevier, vol. 18(3), pages 142-155, August.
- E. Agliardi & R. Andergassen, 2006. "Last Resort Gambles, Risky Debt and Liquidation Policy," Working Papers 577, Dipartimento Scienze Economiche, Universita' di Bologna.
- Elettra Agliardi & Rainer Andergassen, 2007. "Last Resort Gambles, Risky Debt and Liquidation Policy," Working Paper Series 31-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
- Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
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