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Optimal Debt Structure and the Number of Creditors

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  • Bolton, Patrick
  • Scharfstein, David S

Abstract

Within an optimal contracting framework, the authors analyze the optimal number of creditors a company borrows from. They also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern rule renegotiation of debt contracts. The key to the authors' analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. Copyright 1996 by University of Chicago Press.

Suggested Citation

  • Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
    • Handle: RePEc:ucp:jpolec:v:104:y:1996:i:1:p:1-25
    DOI: 10.1086/262015
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    References listed on IDEAS

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    1. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    2. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 541-555.
    3. Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 625-658.
    4. Berkovitch, Elazar & Kim, E Han, 1990. "Financial Contracting and Leverage Induced Over- and Under-Investment Incentives," Journal of Finance, American Finance Association, vol. 45(3), pages 765-794, July.
    5. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    6. Gertner, Robert & Scharfstein, David, 1991. "A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
    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. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
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