The Design of Corporate Debt Structure and Bankruptcy

Review of Financial Studies, Forthcoming

42 Pages Posted: 18 Jun 2010

See all articles by Ernst-Ludwig von Thadden

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science

Gérard Roland

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 18, 2009

Abstract

The paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules are therefore a necessary part of the overall financing contract, to make claims consistent and to prevent a value reducing run for the assets of the firm. We characterize these rules, with predictions about the allocation of security rights, the right to trigger bankruptcy and the symmetry of treatment of creditors in default.

Keywords: Bankruptcy, Debt Structure, Contracts.

JEL Classification: G3, K2

Suggested Citation

von Thadden, Ernst-Ludwig and Berglöf, Erik and Roland, Gérard, The Design of Corporate Debt Structure and Bankruptcy (October 18, 2009). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1626821

Ernst-Ludwig Von Thadden (Contact Author)

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Gérard Roland

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4321 (Phone)
510-642-6615 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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