IDEAS home Printed from https://ideas.repec.org/a/ucp/jlawec/v37y1994i2p455-76.html
   My bibliography  Save this article

Agency Problems of Debt, Convertible Securities, and Deviations from Absolute Priority in Bankruptcy

Author

Listed:
  • Frierman, Michael
  • Viswanath, P V

Abstract

It has been suggested that convertible debt can be used to reduce the tendency toward excessive risk taking in a firm that includes debt in its capital structure. We show that the ability of convertible debt to perform this function is greatly reduced if stakeholders can trade in derivative securities with payoffs contingent on the cash flows of the firm. We show, further, that bankruptcy courts can ensure the same result precisely by deviating from absolute priority. Our model explains two real-world phenomena; one, why bankruptcy law seems to be structured in such a way as to favor equity holders and facilitate deviations from absolute priority, and two, why small firms are more likely to use convertible debt. Copyright 1994 by the University of Chicago.

Suggested Citation

  • Frierman, Michael & Viswanath, P V, 1994. "Agency Problems of Debt, Convertible Securities, and Deviations from Absolute Priority in Bankruptcy," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 455-476, October.
  • Handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:455-76
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/467320
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John, Kose, 1987. " Risk-Shifting Incentives and Signalling through Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 42(3), pages 623-641, July.
    2. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    3. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
    4. Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-123.
    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


    Cited by:

    1. Viswanath, P. V. & Frierman, Mike, 1995. "Asset fungibility and equilibrium capital structures," Journal of Economics and Business, Elsevier, vol. 47(4), pages 319-334, October.
    2. Blazy, RĂ©gis & Martel, Jocelyn & Nigam, Nirjhar, 2014. "The choice between informal and formal restructuring: The case of French banks facing distressed SMEs," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 248-263.
    3. Graff, Richard A. & Kairys Jr., Joseph P., 2005. "Property Rights and Corporate Finance," Working Papers in Economics 174, University of Gothenburg, Department of Economics.
    4. Wihlborg, Clas, 2002. "Insolvency and Debt Recovery Procedures in Economic Development: An Overview of African Law," WIDER Working Paper Series 027, World Institute for Development Economic Research (UNU-WIDER).
    5. 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.
    6. Buttwill, Klas & Wihlborg, Clas, 2005. "The Efficiency of the Bankruptcy Process. An International Comparison," Ratio Working Papers 65, The Ratio Institute.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:455-76. 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: (Journals Division). General contact details of provider: http://www.journals.uchicago.edu/JLE/ .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.