Advanced Search
MyIDEAS: Login to save this paper or follow this series

Ex Ante Costs of Violating Absolute Priority in Bankruptcy

Contents:

Author Info

  • Lucian Arye Bebchuk

Abstract

A basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority. Research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects. In contrast, this paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders. Such deviations aggravate the moral hazard problem with respect to project choice - increasing the equityholders' incentive to favor risky projects - as well as with respect to borrowing and dividend decisions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w8388.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8388.

as in new window
Length:
Date of creation: Jul 2001
Date of revision:
Publication status: published as Bebchuk, Lucian Arye. "Ex Ante Costs Of Violating Absolute Priority In Bankruptcy," Journal of Finance, 2002, v57(1,Feb), 445-460.
Handle: RePEc:nbr:nberwo:8388

Note: LE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lucian Arye Bebchuk & Howard F. Chang, 1991. "Bargaining and the Division of Value in Corporate Reorganization," NBER Technical Working Papers 0097, National Bureau of Economic Research, Inc.
  2. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc.
  3. Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 4(2), pages 13-34.
  4. Lucian Arye Bebchuk, 1998. "Chapter 11," NBER Working Papers 6473, National Bureau of Economic Research, Inc.
  5. David M. Cutler & Lawrence H. Summers, 1988. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 157-172, Summer.
  6. Aghion, Philippe & Hart, Oliver & Moore, John, 1992. "The Economics of Bankruptcy Reform," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 8(3), pages 523-46, October.
  7. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(2), pages 129-51, Spring.
  8. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 117-161, June.
  9. Berkovitch, Elazar & Israel, Ronen, 1999. "Optimal Bankruptcy Laws across Different Economic Systems," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(2), pages 347-77.
  10. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 315-353, October.
  11. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1997. "Optimal bankruptcy law and firm-specific investments," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 487-497, April.
  12. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
  13. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 337-47, May.
  14. Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-23.
  15. Allan C. Eberhart & Lemma W. Senbet, 1993. "Absolute Priority Rule Violations and Risk Incentives for Financially Distressed Firms," Financial Management, Financial Management Association, Financial Management Association, vol. 22(3), Fall.
  16. Povel, Paul, 1999. "Optimal "Soft" or "Tough" Bankruptcy Procedures," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 15(3), pages 659-84, October.
  17. Matthew Rhodes-Kropf & S. Viswanathan, 2000. "Corporate Reorganizations and Non-Cash Auctions," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1807-1854, 08.
  18. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  19. Lucian Arye Bebchuk, 2000. "Using Options to Divide Value in Corporate Bankruptcy," NBER Working Papers 7614, National Bureau of Economic Research, Inc.
  20. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 285-314, October.
  21. Baird, Douglas G., 1991. "The initiation problem in bankruptcy," International Review of Law and Economics, Elsevier, Elsevier, vol. 11(2), pages 223-232, September.
  22. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1998. "The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 33(04), pages 441-464, December.
  23. Bhattacharyya, Sugato & Singh, Rajdeep, 1999. "The resolution of bankruptcy by auction: allocating the residual right of design," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 269-294, December.
  24. Heinkel, Robert & Zechner, Josef, 1993. "Financial Distress and Optimal Capital Structure Adjustments," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 2(4), pages 531-65, Winter.
  25. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, Elsevier, vol. 35(3), pages 349-370, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8388. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.