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How Recovery Process Influences the Design of Debt Contracts?

Listed author(s):
  • Régis Blazy

    ()

    (Luxembourg School of Finance, University of Luxembourg)

  • Laurent Weill

Literature on ex-ante efficiency of bankruptcy procedures investigates how these procedures influence the behavior of managers and creditors. We extend this literature by explaining how bankruptcy law can influence the design of debt contracts through the recovery process. We develop a model of a lending relationship with moral hazard with an active bank taking a decision regarding the continuation or the liquidation of the borrower in case of default. We show the impact of the recovery process on the design of debt contracts (loan rate, collateralized percentage of the loan).

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File URL: http://www.lsf.lu/eng/content/download/481/2632/file/06-08.pdf
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Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 06-08.

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Date of creation: 2006
Handle: RePEc:crf:wpaper:06-08
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  1. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
  2. Cornelli, Francesca & Felli, Leonardo, 1997. "Ex-ante efficiency of bankruptcy procedures," European Economic Review, Elsevier, vol. 41(3-5), pages 475-485, April.
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