Incentive-compatibility, limited liability and costly liquidation in financial contracting

Gui, Zhengqing ; Thadden, Ernst-Ludwig von ; Zhao, Xiaojian

Document Type: Working paper
Year of publication: 2016
The title of a journal, publication series: SSRN Working Paper Series
Place of publication: Rochester, NY
Edition: Rev. 2019
Publication language: English
Institution: School of Law and Economics > Microeconomics and Finance (von Thadden (2004-)
Subject: 330 Economics
Abstract: This paper studies a financial contracting problem where a firm privately observes its cash flow and faces a limited liability constraint. The firm's collateral is piecemeal divisible and can only be liquidated continuously by resorting to the service of a costly third party, typically associated with bankruptcy. In this situation, multi-class collateralized debt is optimal, in which the firm makes several debt-like promises with a seniority structure. The decision over continuous and piecemeal liquidation depends on both the cost of introducing the third party and the firm's funding need. Allowing the firm to refinance ex-post through surreptitious liquidation may reduce the firm's ex-ante payoff, consistent with covenants in debt contracts prohibiting the sale of assets.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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