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http://ssrn.com/abstract=2048621
 
 

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Market Conditions and Contract Design: Variations in Debt Contracting


Albert H. Choi


University of Virginia School of Law

George G. Triantis


Stanford Law School

February 26, 2013

New York University Law Review, Forthcoming
Stanford Law and Economics Olin Working Paper No. 428
Virginia Law and Economics Research Paper No. 2012-07

Abstract:     
Scholars have cataloged rigidities in contract design. Some have observed that boilerplate provisions are remarkably resistant to change, even in the face of shocks such as adverse judicial interpretations. Empirical studies of debt contracts and collateral, in contrast, suggest that covenant and collateral terms are customized to the characteristics of the borrower and evolve in response to changes in market conditions, such as expansion and contraction in credit supply. Building on the adverse selection and moral hazard theories of covenants and collateral, we demonstrate that an expansion (contraction) of credit will lead not only to a decrease (increase) in the interest rate but also a reduction (expansion) of covenants and collateral through lessening (worsening) adverse selection and moral hazard problems. We conclude with some empirical implications of this analysis.

Number of Pages in PDF File: 30

Keywords: contracts, corporate finance, bargaining power, adverse selection, moral hazard

JEL Classification: D82, K12, K22, L14

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Date posted: May 1, 2012 ; Last revised: February 27, 2013

Suggested Citation

Choi, Albert H. and Triantis, George G., Market Conditions and Contract Design: Variations in Debt Contracting (February 26, 2013). New York University Law Review, Forthcoming; Stanford Law and Economics Olin Working Paper No. 428; Virginia Law and Economics Research Paper No. 2012-07. Available at SSRN: http://ssrn.com/abstract=2048621

Contact Information

Albert H. Choi
University of Virginia School of Law ( email )
580 Massie Road
Charlottesville, VA 22903
United States

George G. Triantis (Contact Author)
Stanford Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
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