Mandatory Equity Issuances as a First-Best Solution to Punishing Corporate Misconduct
17 Pages Posted: 3 May 2023
Date Written: April 21, 2023
Corporate liability may lead to insolvency. Prosecutors who are concerned with job losses following insolvency may reduce liability in order to limit collateral consequences. In this article I analyze firms' choices of financing and malfeasance when decision makers take collateral consequences into account. I show that in equilibrium, firms will borrow excessively and engage in welfare-decreasing malfeasance, and prosecutors will impose insufficient liability to deter corporations. I show that the first-best can be achieved by mandating the firms pay liability through equity issuances.
Keywords: Corporate Liability, Collateral Consequences, Law and Economics, Corporate Finance
JEL Classification: K13, K20, K42, G32
Suggested Citation: Suggested Citation