An Incomplete Contracts Approach to Corporate Bankruptcy
AbstractThis 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 InfoPaper 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.
Length: 32 pages
Date of creation: Apr 2000
Date of revision: Apr 2002
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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
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
More information through EDIRC
bankruptcy; debt structure; contracts;
Find related papers by JEL classification:
- G3 - Financial Economics - - Corporate Finance and Governance
- K2 - Law and Economics - - Regulation and Business Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-09-18 (All new papers)
- NEP-CFN-2000-09-18 (Corporate Finance)
- NEP-FIN-2000-09-18 (Finance)
- NEP-IND-2000-09-18 (Industrial Organization)
- NEP-LAW-2000-09-18 (Law & Economics)
- NEP-MIC-2000-09-18 (Microeconomics)
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