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Ex Ante Costs of Violating Absolute Priority in Bankruptcy

  • Lucian Arye Bebchuk

A basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority. Research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects. In contrast, this paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders. Such deviations aggravate the moral hazard problem with respect to project choice - increasing the equityholders' incentive to favor risky projects - as well as with respect to borrowing and dividend decisions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8388.

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Date of creation: Jul 2001
Date of revision:
Publication status: published as Bebchuk, Lucian Arye. "Ex Ante Costs Of Violating Absolute Priority In Bankruptcy," Journal of Finance, 2002, v57(1,Feb), 445-460.
Handle: RePEc:nbr:nberwo:8388
Note: LE
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