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Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules

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  • Stanley D. Longhofer

Abstract

An analysis showing that allowing creditors to \"run\" on a firm in financial distress is socially valuable, since it compensates them for monitoring the firm's condition; in contrast, strict adherence to absolute and proportionate priority rules allows lenders to free ride on the monitoring efforts of others, exacerbating the firm's moral hazard problem.

Suggested Citation

  • Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Papers (Old Series) 9415, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9415
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