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An Incomplete Contracts Approach to Corporate Bankruptcy

Author

Listed:
  • 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.

Suggested Citation

  • Erik BERGLÖF & Gérard ROLAND & Ernst-Ludwig VON THADDEN, 2000. "An Incomplete Contracts Approach to Corporate Bankruptcy," Cahiers de Recherches Economiques du Département d'économie 00.12, Université de Lausanne, Faculté des HEC, Département d’économie, revised Apr 2002.
    • Handle: RePEc:lau:crdeep:00.12
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    File URL: http://www.hec.unil.ch/deep/textes/00.12bis.pdf
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    Citations

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    Cited by:

    1. Itzhak Gilboa & David Schmeidler, 2003. "Inductive Inference: An Axiomatic Approach," Econometrica, Econometric Society, vol. 71(1), pages 1-26, January.
    2. Hallak, Issam, 2002. "Why borrowers pay premiums to larger lenders: Empirical evidence from sovereign syndicated loans," CFS Working Paper Series 2002/02, Center for Financial Studies (CFS).
    3. 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.
    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. Ariane Lambert-Mogiliansky & Konstantin Sonin & Ekaterina Zhuravskaya, 2003. "Capture of Bankruptcy: Theory and Russian Evidence," Working Papers w0038, New Economic School (NES).
    6. Hans K. Hvide & Tore Leite, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Finance 0311003, University Library of Munich, Germany.
    7. Antje Brunner & Jan Pieter Krahnen, 2008. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 415-442.
    8. Hainz, Christa, 2004. "Quality of Institutions, Credit Markets and Bankruptcy," Discussion Papers in Economics 388, University of Munich, Department of Economics.
    9. Kenneth Ayotte & Hayong Yun, "undated". "Matching Bankruptcy Laws to Legal Environments," American Law & Economics Association Annual Meetings 1018, American Law & Economics Association.
    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.
    11. Gerhard Illing, 2000. "Bailing in the private sector," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 35(2), pages 64-71, March.

    More about this item

    Keywords

    bankruptcy; debt structure; contracts;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • K2 - Law and Economics - - Regulation and Business Law

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