Control Rights, Debt Structure, and the Loss of Private Benefits: The Case of the UK Insolvency Code
AbstractThis paper, focusing on the UK insolvency code, shows how the efficiency of reorganization is affected by the distribution of control rights. Control rights raise particular problems when creditors have different incentives to keep the firm as a going concern. Such differences may arise from the possession of private benefits by particular creditors; e.g. valuable business relationships which are lost if the debtor firm is liquidated. We show that the incidence of inefficient liquidations, resulting from the failure to preserve private benefits, is influenced by the size and seniority of creditors' claims. The current UK code is widely thought to give rise to inefficient liquidations (see, for example, Aghion, Hart and Moore (1992), Webb (1991), and White (1992)). This view is based upon the creditor oriented nature of the code. We show, however, that the inefficiency depends upon whether the controlling creditor in formal bankruptcy has private benefits. Our model yields predictions which are similar to the empirical findings for the United States: deviations from absolute priority are larger in workouts than in formal reorganization (Chapter 11). This is a symptom of any code where one party has a credible threat to take the firm into formal reorganization and waste assets, imposing a disproportionate cost on some creditors.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ in its series CEPR Financial Markets Paper with number 0047.
Date of creation: Apr 1994
Date of revision:
Availability: in print
Contact details of provider:
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Franks, Julian R & Nyborg, Kjell G, 1996. "Control Rights, Debt Structure, and the Loss of Private Benefits: The Case of the U.K. Insolvency Code," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1165-1210.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Renneboog, Luc & Simons, Tomas & Wright, Mike, 2007. "Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 591-628, September.
- Renneboog, L.D.R. & Simons, T. & Wright, M., 2005.
"Leveraged Public to Private Transactions in the UK,"
2005-60, Tilburg University, Center for Economic Research.
- Renneboog, L.D.R. & Simons, T. & Wright, M., 2005. "Leveraged Public to Private Transactions in the UK," Discussion Paper 2005-015, Tilburg University, Tilburg Law and Economic Center.
- Nicola Gennaioli & Stefano Rossi, 2013.
"Contractual Resolutions of Financial Distress,"
Review of Financial Studies,
Society for Financial Studies, vol. 26(3), pages 602-634.
- Nicola Gennaioli & Stefano Rossi, 2006. "Contractual resolutions of financial distress," Economics Working Papers 1316, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2012.
- Nicola Gennaioli & Stefano Rossi, 2012. "Contractual Resolutions of Financial Distress," Working Papers 651, Barcelona Graduate School of Economics.
- Eckbo, B. Espen & Thorburn, Karin S., 2004.
"Bidding in mandatory bankruptcy auctions: Theory and evidence,"
2004/16, Department of Business and Management Science, Norwegian School of Economics.
- Eckbo, B Espen & Thorburn, Karin S, 2005. "Bidding in Mandatory Bankruptcy Auctions: Theory and Evidence," CEPR Discussion Papers 4873, C.E.P.R. Discussion Papers.
- 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.
- Ron Anderson & Kjell G. Nyborg, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," FMG Discussion Papers dp376, Financial Markets Group.
- Anderson, Ronald W & Nyborg, Kjell G, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," CEPR Discussion Papers 2920, C.E.P.R. Discussion Papers.
- Benjamin, David, 2006.
"Fast bargaining in bankruptcy,"
Discussion Paper Series In Economics And Econometrics
0601, Economics Division, School of Social Sciences, University of Southampton.
- Calcagno, R. & Renneboog, L.D.R., 2004.
"Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority,"
2004-015, Tilburg University, Tilburg Law and Economic Center.
- Calcagno, R. & Renneboog, L.D.R., 2004. "Capital Structure and Managerial Compensation: The Effects of Renumeration Seniority," Discussion Paper 2004-120, Tilburg University, Center for Economic Research.
- Calcagno, Riccardo & Renneboog, Luc, 2007. "The incentive to give incentives: On the relative seniority of debt claims and managerial compensation," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1795-1815, June.
- Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
- Stanley D. Longhofer & Stephen R. Peters, 2000. "Protection for whom? creditor conflicts in bankruptcy," Working Paper 9909R, Federal Reserve Bank of Cleveland.
- Hege, Ulrich, 2003. "Workouts, court-supervised reorganization and the choice between private and public debt," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 233-269, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.