An Economic Analysis of Fraudulent Conveyance Law

Journal of Financial Intermediation, Vol. 9, pp. 169-183 (2000).

Posted: 15 May 1997 Last revised: 17 Feb 2019

Date Written: May 1, 1997


Fraudulent conveyance law forbids transactions where a debtor receives less than "reasonably equivalent value" for a transfer of the debtor's assets and is insolvent after the transfer. Three insights emerge from the formal analysis. First, the primary economic role of fraudulent conveyance law is to increase debt capacity, ensuring that socially optimal investment is not deterred by the possibility of asset transfers that prevent lenders from being repaid. Because a debtor's incentive to remove assets is highest when liquidation values are high, fraudulent conveyance law is especially important in resolving the otherwise paradoxical result that high liquidation values would severely lower debt capacity. Second, fraudulent conveyance law is best viewed as a property rule rather than an "off-the-shelf" contract term all borrowers and lenders would want in their debt contracts, because its power arises from the fact that it can be invoked against those not party to the financial contract against whom the lender otherwise would have no remedy. Third, fraudulent conveyance law faces serious limits in controlling 'asset substitution,' or 'risk shifting,' problems. This helps explain the comparative economic role of some bond covenants and the need for a shift of fiduciary duty at the brink of insolvency. Fraudulent conveyance law serves as an important example of how a background rule that parties cannot avoid solves an otherwise intractable incomplete contracting problem. Future work on financial contracting should pay closer attention to such rules.

JEL Classification: G33

Suggested Citation

Heaton, J.B., An Economic Analysis of Fraudulent Conveyance Law (May 1, 1997). Journal of Financial Intermediation, Vol. 9, pp. 169-183 (2000).. Available at SSRN:

J.B. Heaton (Contact Author)

J.B. Heaton, P.C. ( email )

20 West Kinzie
17th Floor
Chicago, IL 60654
United States
(312) 487-2600 (Phone)


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