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Contracting About Bankruptcy

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  • Alan Schwartz

    ()
    (Law School)

Abstract

Creditors and the insolvent firm are required to use the state supplied bankruptcy procedure if they cannot agree on a private resolution after financial distress has occurred. While these ex post workouts are legal, parties cannot agree in the lending contracts to use a bankruptcy procedure alternative to the one the state supplies. This paper considers this legal prohibition. The paper makes three principal claims: the prohibition on contracting for preferred bankruptcy procedures exacerbates underinvestment; the prohibition should be lifted for this reason and because parties could coordinate on "bankruptcy contracts" although firms tend to have numerous creditors, who lend at different times and may have different preferences over procedures; and methodologically, that regulators should take the ability of parties to contract about bankruptcy issues into account when devising legal rules.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm71.

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Date of creation: 08 Apr 1997
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Handle: RePEc:ysm:somwrk:ysm71

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Web page: http://icf.som.yale.edu/
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Cited by:
  1. Tarbalouti, Mr, 2010. "Défaut de paiement,Achat de consentement et efficience économique
    [Default, purchase of consent and economic effeciency]
    ," MPRA Paper 56220, University Library of Munich, Germany.
  2. Nicola Gennaioli & Stefano Rossi, 2010. "Judicial Discretion in Corporate Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 4078-4114, November.
  3. 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.
  4. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
  5. Inderst, Roman, 2006. "Consumer Lending When Lenders are More Sophisticated Than Households," CEPR Discussion Papers 5410, C.E.P.R. Discussion Papers.
  6. Pindado, Julio & Rodrigues, Luis & de la Torre, Chabela, 2008. "How do insolvency codes affect a firm's investment?," International Review of Law and Economics, Elsevier, vol. 28(4), pages 227-238, December.
  7. Dailami, Mansoor & Hauswald, Robert, 2000. "Risk shifting and long-term contracts : evidence from the Ras Gas Project," Policy Research Working Paper Series 2469, The World Bank.
  8. Bigus, Jochen, 2002. "Bankruptcy law, asset substitution problem, and creditor conflicts," International Review of Law and Economics, Elsevier, vol. 22(2), pages 109-132, August.
  9. John Armour & Audrey Hsu & Adrian Walters, 2006. "The costs and benefits of secured creditor control in bankruptcy: Evidence from the UK," ESRC Centre for Business Research - Working Papers wp332, ESRC Centre for Business Research.
  10. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  11. Dailami, Mansoor & Hauswald, Robert, 2003. "The emerging project bond market - covenant provisions and credit spreads," Policy Research Working Paper Series 3095, The World Bank.
  12. Acharya, Viral V. & Amihud, Yakov & Litov, Lubomir, 2011. "Creditor rights and corporate risk-taking," Journal of Financial Economics, Elsevier, vol. 102(1), pages 150-166, October.
  13. Stanley D. Longhofer & Stephen R. Peters, 2000. "Protection for whom? creditor conflicts in bankruptcy," Working Paper 9909R, Federal Reserve Bank of Cleveland.
  14. Bhattacharyya, Sugato & Singh, Rajdeep, 1999. "The resolution of bankruptcy by auction: allocating the residual right of design," Journal of Financial Economics, Elsevier, vol. 54(3), pages 269-294, December.

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