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How Recovery Process Influences the Design of Debt Contracts?

Author

Listed:
  • Régis Blazy

    () (Luxembourg School of Finance, University of Luxembourg)

  • Laurent Weill

Abstract

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).

Suggested Citation

  • Régis Blazy & Laurent Weill, 2006. "How Recovery Process Influences the Design of Debt Contracts?," LSF Research Working Paper Series 06-08, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:06-08
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    File URL: http://www.lsf.lu/eng/content/download/481/2632/file/06-08.pdf
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    References listed on IDEAS

    as
    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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    More about this item

    Keywords

    Bankruptcy; Collateral; Debt Contract.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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