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How Recovery Process Influences the Design of Debt Contracts?

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Author Info
Régis Blazy () (Luxembourg School of Finance, University of Luxembourg)
Laurent Weill

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Abstract

Literature on ex-ante efficiency of bankruptcy procedures investigates how these procedures influence the behavior of managers and creditors. We extend this literature by explaining how bankruptcy law can influence the design of debt contracts through the recovery process. We develop a model of a lending relationship with moral hazard with an active bank taking a decision regarding the continuation or the liquidation of the borrower in case of default. We show the impact of the recovery process on the design of debt contracts (loan rate, collateralized percentage of the loan).

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Publisher Info
Paper provided by CREFI-LSF, University of Luxembourg in its series Working Papers of CREFI-LSF (Centre of Research in Finance - Luxembourg School of Finance) with number 06-08.

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Date of creation: 2006
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Handle: RePEc:crf:wpaper:06-08

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Web page: http://fdef.uni.lu/index.php/fdef/lux_school_of_finance/crefi_lsf
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Related research
Keywords: Bankruptcy; Collateral; Debt Contract.;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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  1. Cornelli, Francesca & Felli, Leonardo, 1997. "Ex-ante efficiency of bankruptcy procedures," European Economic Review, Elsevier, vol. 41(3-5), pages 475-485, April. [Downloadable!] (restricted)
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  2. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 473-94, July. [Downloadable!] (restricted)
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