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Bankruptcy Regimes and Gambling on Resurrection

Author

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  • Ondrej Knot
  • Ondrej Vychodil

Abstract

This paper analyzes debt contracting in the presence of gambling on resurrection under different bankruptcy regimes. Ex-ante effects on investment levels, interest rates and profit, and ex-post effects on debtor's strategy choices are examined. A model of a debtor-creditor relationship is presented which shows that violation of the Absolute Priority Rule in bankruptcy (soft bankruptcy law) may partially eliminate excessive managerial risk-taking. But under law that is insufficiently soft, this moral hazard problem may be even stronger than under completely tough law. The gambling on resurrection argument for soft law is further weakened if the possibility of verifying the firm's situation by creditors is introduced.

Suggested Citation

  • Ondrej Knot & Ondrej Vychodil, 2006. "Bankruptcy Regimes and Gambling on Resurrection," CERGE-EI Working Papers wp290, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp290
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp290.pdf
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    Cited by:

    1. Agliardi, Elettra & Andergassen, Rainer, 2009. "Last resort gambles, risky debt and liquidation policy," Review of Financial Economics, Elsevier, vol. 18(3), pages 142-155, August.
    2. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, July.
    3. repec:rim:rimwps:31-07 is not listed on IDEAS

    More about this item

    Keywords

    Corporate bankruptcy; debt contracts; monitoring.;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K39 - Law and Economics - - Other Substantive Areas of Law - - - Other

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