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Ex Ante Costs of Violating Absolute Priority in Bankruptcy

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Author Info
Lucian Arye Bebchuk

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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.

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

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Date of creation: Jul 2001
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Handle: RePEc:nbr:nberwo:8388

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Find related papers by JEL classification:
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
K20 - Law and Economics - - Regulation and Business Law - - - General

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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.:
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    Other versions:
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    Other versions:
  7. Heinkel, Robert & Zechner, Josef, 1993. "Financial Distress and Optimal Capital Structure Adjustments," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 2(4), pages 531-65, Winter.
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    Other versions:
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Cited by:
(explanations, 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.)

  1. Robin Mason & Helen Weeds, 2007. "Merger Policy, Entry, and Entrepreneurship," Economics Discussion Papers 634, University of Essex, Department of Economics. [Downloadable!]
  2. R. Fischer & C. Bonilla, 2004. "Endogenous Credit Constraints and Factor Market Rigidities: the case of Bankruptcy," Econometric Society 2004 Latin American Meetings 240, Econometric Society. [Downloadable!]
  3. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Bharath, Sreedhar T. & Panchapegesan, Venky & Werner, Ingrid, 2007. "The Changing Nature of Chapter 11," Working Paper Series 2008-4, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  5. Dan Galai & Alon Raviv & Zvi Wiener, 2003. "Liquidation Triggers and the Valuation of Equity and Debt," Finance 0305002, EconWPA. [Downloadable!]
    Other versions:
  6. Acharya, Viral V & Subramanian, Krishnamurthy, 2007. "Bankruptcy Codes and Innovation," CEPR Discussion Papers 6307, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Filippo Ippolito, 2005. "Convertible Preferred Stock in Venture Capital Financing," OFRC Working Papers Series 2005fe12, Oxford Financial Research Centre. [Downloadable!]
  8. Acharya, Viral V & John, Kose & Sundaram, Rangarajan K, 2005. "Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes," CEPR Discussion Papers 4916, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Alexander Dilger, 2006. "Forced to make mistakes: Reasons for complaining about Bebchuk's scheme and other market-oriented insolvency procedures," European Journal of Law and Economics, Springer, vol. 21(1), pages 79-94, January. [Downloadable!] (restricted)
  10. Buttwill, Klas & Wihlborg, Clas, 2005. "The Efficiency of the Bankruptcy Process. An International Comparison," Ratio Working Papers 65, The Ratio Institute. [Downloadable!]
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