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An Incomplete Contracts Approach to Corporate Bankruptcy

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Author Info

  • Erik BERGLÖF
  • Gérard ROLAND
  • Ernst-Ludwig VON THADDEN

Abstract

This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an incomplete contract framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules, therefore, are a necessary part of the overall financing contract, to make claims consisitent and to prevent a value reducing run for the assets of the firm. Furthermore, a too unequal allocation of security rights is not optimal, and creditors are not treated asymmetrically in default under the optimal contract.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 00.12.

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Length: 32 pages
Date of creation: Apr 2000
Date of revision: Apr 2002
Handle: RePEc:lau:crdeep:00.12

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Related research

Keywords: bankruptcy; debt structure; contracts;

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Citations

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Cited by:
  1. Itzhak Gilboa & David Schmeidler, 2002. "Inductive Inference: An Axiomatic Approach," Levine's Working Paper Archive 391749000000000544, David K. Levine.
  2. Gerhard Illing, 2000. "Bailing in the private sector," Intereconomics: Review of European Economic Policy, Springer, vol. 35(2), pages 64-71, March.
  3. Issam Hallak, 2004. "Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans," CSEF Working Papers 124, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
  5. Antje Brunner & Jan Pieter Krahnen, 2008. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 415-442.
  6. Hainz, Christa, 2004. "Quality of Institutions, Credit Markets and Bankruptcy," Discussion Papers in Economics 388, University of Munich, Department of Economics.
  7. Hans K. Hvide & Todd Kaplan, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Microeconomics 0311001, EconWPA.
  8. Kenneth Ayotte & Hayong Yun, . "Matching Bankruptcy Laws to Legal Environments," American Law & Economics Association Annual Meetings 1018, American Law & Economics Association.
  9. Ulrich Hege & Pierre Mella-Barral, 2005. "Repeated Dilution of Diffusely Held Debt," The Journal of Business, University of Chicago Press, vol. 78(3), pages 737-786, May.
  10. Daniela Fabbri, 2001. "The Legal Enforcement of Credit Contracts and the Level of Investment," CSEF Working Papers 57, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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