Creditor’s Holdup, Releveraging and the Setting of Private Appropriation in a Control Contract Between Shareholders

62 Pages Posted: 11 Sep 2019

Date Written: September 3, 2019

Abstract

Debt is analyzed in relation to the conflict between three parties, a controlling shareholder, outside investors and creditors. We follow Jensen and Meckling’s (1976) and Myers’ (1977) intuitions that a leverage may result in excess value appropriation by creditors while at the same time acting to discipline private benefits appropriation. A contingent claim valuation model is used to show that debt releveraging is also a key governance variable when incentivization triggers a transfer of value to creditors. We show that debt is a complex regulation tool in an agency contract approach as it interferes endogenously with private benefits incentivization schemes particularly when value creation events occur.

Keywords: creditors’ holdup, private benefits, controlling shareholders, debt leverage, releveraging, corporate governance

JEL Classification: G32, G34

Suggested Citation

de La Bruslerie, Hubert, Creditor’s Holdup, Releveraging and the Setting of Private Appropriation in a Control Contract Between Shareholders (September 3, 2019). Available at SSRN: https://ssrn.com/abstract=3447280 or http://dx.doi.org/10.2139/ssrn.3447280

Hubert De La Bruslerie (Contact Author)

Université Paris Dauphine ( email )

DRM Finance
Paris, 75116
France
(33) 1 44 05 44 05 (Phone)

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