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Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders

Author

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  • Hubert de La Bruslerie

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Simon Gueguen

    (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

Debt is analyzed in relation to the conflict between three parties, a controlling shareholder, outside investors and creditors. We follow Jensen and Meckling's (1976) and Myers' (1977) intuitions that leverage may result in excess value appropriation by creditors while at the same time acting to discipline private benefits appropriation. Creditors' holdup refers to the appropriation by the incumbent debtholders of a large part of the additional value created by an incentivized controlling shareholder. This paper introduces a negotiation framework between controlling and outside shareholders in which releveraging and private benefits are decided while the process of value creation initiates a transfer of value to the creditors. The admissible contracts of control involve a minimum jump in leverage. This result gives a theoretical foundation for the leveraged recap decisions observed in the market and one-off variations of the capital structure.

Suggested Citation

  • Hubert de La Bruslerie & Simon Gueguen, 2021. "Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders," Post-Print hal-03366329, HAL.
    • Handle: RePEc:hal:journl:hal-03366329
    Note: View the original document on HAL open archive server: https://hal.science/hal-03366329
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    References listed on IDEAS

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    1. Anat R. Admati & Peter M. Demarzo & Martin F. Hellwig & Paul Pfleiderer, 2018. "The Leverage Ratchet Effect," Journal of Finance, American Finance Association, vol. 73(1), pages 145-198, February.
    2. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
    3. Erwan Morellec & Boris Nikolov & Norman Schürhoff, 2012. "Corporate Governance and Capital Structure Dynamics," Journal of Finance, American Finance Association, vol. 67(3), pages 803-848, June.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    6. Bhattacharya, Utpal & Daouk, Hazem & Welker, Michael, 2003. "The World Price of Earnings Opacity," Working Papers 127185, Cornell University, Department of Applied Economics and Management.
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    Cited by:

    1. Hubert Bruslerie & Luminita Enache, 2023. "The dynamics of leverage of newly controlled target firms: evidence after an acquisition," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 411-445, August.

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