Financial contracts and the legal treatment of informed investors
AbstractThe authors explore the economic rationale for equitable subordination, a legal doctrine that permits a firm's claimants to seek to subordinate an informed investor's financial claim in bankruptcy court. Fear of equitable subordination is often cited as a reason that banks in the U.S. are wary of taking an active management role in their borrowing firms. The authors show that an optimally designed menu of claims for a large investor will include features that resemble equitable subordination. The authors' model provides a partial rationale for a financial system in which powerful creditors do not generally hold blended debt and equity claims.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 99-8.
Date of creation: 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-10-20 (All new papers)
- NEP-CFN-1999-10-20 (Corporate Finance)
- NEP-FIN-1999-10-20 (Finance)
- NEP-IND-1999-10-20 (Industrial Organization)
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