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Bankruptcy law and financial structure: The impact of managerial incentives

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  • Ansgar Wohlschlegel

Abstract

Providing the manager of a firm with suitable incentives to act in the investors' interest may be socially efficient, but not individually rational for the investors themselves. This paper specifies a second-best arrangement and shows how investors can be induced to implement it by means of an optimal bankruptcy code in the case where only standard financial contracts are available. It explains why bankruptcy law should, in some states of nature, let shareholders and senior creditors decide jointly, and provides a rationale for the existence of junior debt, which never enjoys any power of decision.

Suggested Citation

  • Ansgar Wohlschlegel, 2006. "Bankruptcy law and financial structure: The impact of managerial incentives," The European Journal of Finance, Taylor & Francis Journals, vol. 12(4), pages 333-345.
    • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:333-345
    DOI: 10.1080/13518470500248466
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    References listed on IDEAS

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    1. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1998. "The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(4), pages 441-464, December.
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    5. Zender, Jaime F, 1991. "Optimal Financial Instruments," Journal of Finance, American Finance Association, vol. 46(5), pages 1645-1663, December.
    6. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    7. Michelle J. White, 1980. "Public Policy Toward Bankruptcy: Me-First and Other Priority Rules," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 550-564, Autumn.
    8. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1997. "Optimal bankruptcy law and firm-specific investments," European Economic Review, Elsevier, vol. 41(3-5), pages 487-497, April.
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