Ex Ante Costs of Violating Absolute Priority in Bankruptcy

26 Pages Posted: 27 Sep 2001

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2001


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.

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

JEL Classification: G33, K20, K22

Suggested Citation

Bebchuk, Lucian A., Ex Ante Costs of Violating Absolute Priority in Bankruptcy (August 2001). CEPR Discussion Paper No. 2914. Available at SSRN: https://ssrn.com/abstract=280266

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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