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http://ssrn.com/abstract=277428
 
 

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Ex Ante Costs of Violating Absolute Priority in Bankruptcy


Lucian A. Bebchuk


Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)


Journal of Finance, Vol. 57, pp. 445-460, 2002
Harvard Law and Economics Discussion Paper No. 328, 2001

Abstract:     
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.

Number of Pages in PDF File: 25

Keywords: Bankruptcy, Chapter 11, corporate reorganizations, workouts, absolute priority, moral hazard, asset dilution, claim dilution

JEL Classification: G33, K20, K22

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Date posted: July 21, 2001 ; Last revised: May 10, 2009

Suggested Citation

Bebchuk, Lucian A., Ex Ante Costs of Violating Absolute Priority in Bankruptcy. Journal of Finance, Vol. 57, pp. 445-460, 2002; Harvard Law and Economics Discussion Paper No. 328, 2001. Available at SSRN: http://ssrn.com/abstract=277428 or http://dx.doi.org/10.2139/ssrn.277428

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
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