Creditors and Debt Governance

RESEARCH HANDBOOK ON THE ECONOMICS OF CORPORATE LAW, Claire Hill & Brett McDonnell, eds., Edward Elgar Publishing, 2012

Cornell Legal Studies Research Paper No. 011-04

23 Pages Posted: 13 Feb 2011 Last revised: 25 Feb 2014

Date Written: February 12, 2011


This chapter, from the forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.), provides an introduction to the law and economic theory relating to creditors and debt governance.

The chapter begins with a look at the traditional role of debt, focusing on the impact of debt on corporate governance and, in particular, the effect of an illiquid credit market on creditors’ reliance on covenants and monitoring. It then turns to changes in the private credit market and their effect on lending structure. Greater liquidity raises its own set of agency costs. In response, loans and lending relationships have adjusted to mitigate those costs, providing new means by which debt can influence corporate governance.

Going forward, a firm’s decision to borrow must increasingly take account of the costs and benefits of a liquid credit market. How firms are governed is closely related to how they raise capital. Managers who maximize firm value can finance their business at lower cost than managers who pursue personal goals. Thus, actions that affect a firm’s credit quality are likely to be reflected in changes in the secondary price at which its loans and other credit instruments trade. Those changes, in turn, may affect a borrower’s cost of capital, providing managers with a real incentive to minimize risky behavior. The intuition, described at the end of the chapter, is that a liquid private credit market may begin to provide a discipline that complements the traditional protections of contract.

Keywords: Corporate Governance, Debt Governance, Creditors, Covenants, Private Credit, Credit Derivatives

Suggested Citation

Whitehead, Charles K., Creditors and Debt Governance (February 12, 2011). RESEARCH HANDBOOK ON THE ECONOMICS OF CORPORATE LAW, Claire Hill & Brett McDonnell, eds., Edward Elgar Publishing, 2012, Cornell Legal Studies Research Paper No. 011-04, Available at SSRN:

Charles K. Whitehead (Contact Author)

Cornell Law School ( email )

Myron Taylor Hall
Ithaca, NY 14853
United States

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