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Contractual Resolutions of Financial Distress

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  • Nicola Gennaioli
  • Stefano Rossi

Abstract

In a financial contracting model, we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes coexist--one class fully concentrated and with control rights upon default, the other dispersed and without control rights--removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, which refers to debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. Our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 602-634.
  • Handle: RePEc:oup:rfinst:v:26:y:2013:i:3:p:602-634
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    File URL: http://hdl.handle.net/10.1093/rfs/hhs129
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    Citations

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    Cited by:

    1. Nicola Gennaioli & Enrico Perotti, 2009. "Standardized enforcement: Access to justice vs contractual innovation," Economics Working Papers 1329, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2012.
    2. Aßmuth, Pascal, 2015. "Stock price related financial fragility and growth patterns," Center for Mathematical Economics Working Papers 539, Center for Mathematical Economics, Bielefeld University.
    3. Miguel García-Posada & Juan Mora-Sanguinetti, 2014. "Are there alternatives to bankruptcy? A study of small business distress in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 287-332, August.
    4. Gregory F Udell, 2015. "SME Access to Intermediated Credit: What Do We Know and What Don't We Know?," RBA Annual Conference Volume,in: Angus Moore & John Simon (ed.), Small Business Conditions and Finance Reserve Bank of Australia.
    5. repec:spr:busres:v:10:y:2017:i:1:d:10.1007_s40685-016-0041-8 is not listed on IDEAS
    6. Cerqueiro, G.M. & Ongena, S. & Roszbach, K., 2011. "Collateralization, Bank Loan Rates and Monitoring : Evidence from a Natural Experiment," Discussion Paper 2011-087, Tilburg University, Center for Economic Research.
    7. Rodano, Giacomo & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2016. "Bankruptcy law and bank financing," Journal of Financial Economics, Elsevier, vol. 120(2), pages 363-382.
    8. repec:eee:corfin:v:44:y:2017:i:c:p:308-330 is not listed on IDEAS
    9. Claude Fluet & Paolo G. Garella, 2014. "Debt Rescheduling with Multiple Lenders: Relying on the Information of Others," Economica, London School of Economics and Political Science, vol. 81(324), pages 698-720, October.
    10. Aßmuth, Pascal, 2017. "Stock price related financial fragility and growth patterns," Economics Discussion Papers 2017-108, Kiel Institute for the World Economy (IfW).
    11. Ongena, Steven & Cerqueiro, Geraldo & Roszbach, Kasper, 2016. "Collateral damage? On collateral, corporate financing and performance," Working Paper Series 1918, European Central Bank.
    12. Favara, Giovanni & Morellec, Erwan & Schroth, Enrique & Valta, Philip, 2017. "Debt enforcement, investment, and risk taking across countries," Journal of Financial Economics, Elsevier, vol. 123(1), pages 22-41.

    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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