IDEAS home Printed from https://ideas.repec.org/p/hhs/cbsfin/2001_005.html
   My bibliography  Save this paper

The Impact of Bankruptcy Rules on Risky Project Choice and Skill Formation under Credit Rationing

Author

Listed:
  • Gangopadhyay, Shubhashis

    (Indian Statistical Institute,)

  • Wihlborg, Clas

    (Department of Finance, Copenhagen Business School)

Abstract

The contribution of this paper is in emphasizing endogenous credit rationing in the analysis of effects of bankruptcy rules on entrepeneurs’ decisions with respect to risk-taking and ex ante skill-development. Unlike most of the literature, both the debt claim and the amount of debt financing is endogenous in our exercise. This allows us to determine the extent of credit rationing that banks use to tackle informational asymmetry. Credit rationing is non-trivial and increases the cost of capital when corporations are forced to access alternative sources of funding even when debt is a cheaper alternative. We thus solve for optimal debt-equity ratios in the capital structure of the corporation and entrepeneurs’ risk-taking. Second, we allow entrepeneurs to invest in generating skill to handle risky projects. We show that bankruptcy policies are important determinants of all these outcomes in ways that in some cases contradict the existing literature, which does not consider endogenous credit rationing.

Suggested Citation

  • Gangopadhyay, Shubhashis & Wihlborg, Clas, 2001. "The Impact of Bankruptcy Rules on Risky Project Choice and Skill Formation under Credit Rationing," Working Papers 2001-5, Copenhagen Business School, Department of Finance.
    • Handle: RePEc:hhs:cbsfin:2001_005
    as

    Download full text from publisher

    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7162
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    2. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    3. Gertner, Robert & Scharfstein, David, 1991. "A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
    4. Cornelli, Francesca & Felli, Leonardo, 1997. "Ex-ante efficiency of bankruptcy procedures," European Economic Review, Elsevier, vol. 41(3-5), pages 475-485, April.
    5. Moore, Robert R, 1993. "Asymmetric Information, Repeated Lending, and Capital Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 393-409, August.
    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. Clas Wihlborg, 2002. "Insolvency and Debt Recovery Procedures in Economic Development: An Overview of African Law," WIDER Working Paper Series DP2002-27, World Institute for Development Economic Research (UNU-WIDER).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Régis Blazy & Laurent Weill, 2006. "The Impact of Legal Sanctions on Moral Hazard when Debt Contracts are Renegotiable," LSF Research Working Paper Series 06-09, Luxembourg School of Finance, University of Luxembourg.
    2. Blazy, Régis & Deffains, Bruno & Umbhauer, Gisèle & Weill, Laurent, 2013. "Severe or gentle bankruptcy law: Which impact on investing and financing decisions?," Economic Modelling, Elsevier, vol. 34(C), pages 129-144.
    3. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-585, June.
    4. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    5. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    6. Régis Blazy & Gisèle Umbhauer & Laurent Weill, 2008. "How Bankruptcy Punishment Influences the Ex-Ante Design of Debt Contracts?," LSF Research Working Paper Series 08-04, Luxembourg School of Finance, University of Luxembourg.
    7. Hege, Ulrich, 2003. "Workouts, court-supervised reorganization and the choice between private and public debt," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 233-269, March.
    8. 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.
    9. Fisher, Timothy C G & Martel, Jocelyn, 1995. "The Creditors' Financial Reorganization Decision: New Evidence from Canadian Data," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(1), pages 112-126, April.
    10. Satoshi Koibuchi, 2012. "Debt Forgiveness during Japan’s Lost Decade," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 32, Edward Elgar Publishing.
    11. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
    12. Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, August.
    13. Gordon M Phillips & Vojislav Maksimovic, 1996. "Efficiency of Bankrupt Firms and Industry Conditions: Theory and Evidence," Working Papers 96-12, Center for Economic Studies, U.S. Census Bureau.
    14. Ghosh, Saibal, 2009. "Productivity and Financial Structure: Evidence from Indian High-Tech Firms," MPRA Paper 19467, University Library of Munich, Germany.
    15. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
    16. Anderson, Ronald W. & Sundaresan, Suresh & Tychon, Pierre, 1996. "Strategic analysis of contingent claims," European Economic Review, Elsevier, vol. 40(3-5), pages 871-881, April.
    17. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    18. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    19. Guillaume Colosiez & Mouldi Djelassi, 1993. "La redécouverte des cycles financiers," Revue d'Économie Financière, Programme National Persée, vol. 26(3), pages 109-144.
    20. Agrawal, Ashwini & González-Uribe, Juanita & Martínez-Correa, Jimmy, 2022. "Measuring the ex-ante incentive effects of creditor control rights during bankruptcy reorganization," Journal of Financial Economics, Elsevier, vol. 143(1), pages 381-408.

    More about this item

    Keywords

    credit rationing; Bankruptcy rules; Financing;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:hhs:cbsfin:2001_005. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lars Nondal (email available below). General contact details of provider: https://edirc.repec.org/data/cbschdk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.