Bankruptcy Law and Corporate Investment Decisions

E.T. Tarantino

Research output: Working paperDiscussion paperOther research output

218 Downloads (Pure)

Abstract

This paper contributes to the debate on optimal bankruptcy reform by providing a set of results that challenge the wisdom that "soft" bankruptcy codes have necessarily positive effects. The model hinges on the key idea that "soft" bankruptcy allows a poor performing entrepreneur to renegotiate the terms of the initial contract with a lender. In the presence of moral hazard, the optimal arrangement requires the hampering of project's continuation as punishment for poor performance. However, if the lender can increase recovery rates in bankruptcy such pun- ishment is not renegotiation-proof. Clearly, this exacerbates the agency problem and creates a tension between ex-post and ex-ante effciency that may impede the implementation of long- term projects.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages45
Volume2009-86
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-86

Fingerprint

Corporate investment
Investment decision
Bankruptcy
Bankruptcy law
Punishment
Entrepreneurs
Recovery rate
Agency problems
Renegotiation
Moral hazard
Wisdom

Keywords

  • Bankruptcy Law
  • Financial Contracts
  • Limited Commitment
  • Soft budget con- straint
  • Short-termism

Cite this

Tarantino, E. T. (2009). Bankruptcy Law and Corporate Investment Decisions. (CentER Discussion Paper; Vol. 2009-86). Tilburg: Microeconomics.
Tarantino, E.T. / Bankruptcy Law and Corporate Investment Decisions. Tilburg : Microeconomics, 2009. (CentER Discussion Paper).
@techreport{51475e74b19649b1a2cfb200fb0f11ef,
title = "Bankruptcy Law and Corporate Investment Decisions",
abstract = "This paper contributes to the debate on optimal bankruptcy reform by providing a set of results that challenge the wisdom that {"}soft{"} bankruptcy codes have necessarily positive effects. The model hinges on the key idea that {"}soft{"} bankruptcy allows a poor performing entrepreneur to renegotiate the terms of the initial contract with a lender. In the presence of moral hazard, the optimal arrangement requires the hampering of project's continuation as punishment for poor performance. However, if the lender can increase recovery rates in bankruptcy such pun- ishment is not renegotiation-proof. Clearly, this exacerbates the agency problem and creates a tension between ex-post and ex-ante effciency that may impede the implementation of long- term projects.",
keywords = "Bankruptcy Law, Financial Contracts, Limited Commitment, Soft budget con- straint, Short-termism",
author = "E.T. Tarantino",
note = "Pagination: 45",
year = "2009",
language = "English",
volume = "2009-86",
series = "CentER Discussion Paper",
publisher = "Microeconomics",
type = "WorkingPaper",
institution = "Microeconomics",

}

Tarantino, ET 2009 'Bankruptcy Law and Corporate Investment Decisions' CentER Discussion Paper, vol. 2009-86, Microeconomics, Tilburg.

Bankruptcy Law and Corporate Investment Decisions. / Tarantino, E.T.

Tilburg : Microeconomics, 2009. (CentER Discussion Paper; Vol. 2009-86).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Bankruptcy Law and Corporate Investment Decisions

AU - Tarantino, E.T.

N1 - Pagination: 45

PY - 2009

Y1 - 2009

N2 - This paper contributes to the debate on optimal bankruptcy reform by providing a set of results that challenge the wisdom that "soft" bankruptcy codes have necessarily positive effects. The model hinges on the key idea that "soft" bankruptcy allows a poor performing entrepreneur to renegotiate the terms of the initial contract with a lender. In the presence of moral hazard, the optimal arrangement requires the hampering of project's continuation as punishment for poor performance. However, if the lender can increase recovery rates in bankruptcy such pun- ishment is not renegotiation-proof. Clearly, this exacerbates the agency problem and creates a tension between ex-post and ex-ante effciency that may impede the implementation of long- term projects.

AB - This paper contributes to the debate on optimal bankruptcy reform by providing a set of results that challenge the wisdom that "soft" bankruptcy codes have necessarily positive effects. The model hinges on the key idea that "soft" bankruptcy allows a poor performing entrepreneur to renegotiate the terms of the initial contract with a lender. In the presence of moral hazard, the optimal arrangement requires the hampering of project's continuation as punishment for poor performance. However, if the lender can increase recovery rates in bankruptcy such pun- ishment is not renegotiation-proof. Clearly, this exacerbates the agency problem and creates a tension between ex-post and ex-ante effciency that may impede the implementation of long- term projects.

KW - Bankruptcy Law

KW - Financial Contracts

KW - Limited Commitment

KW - Soft budget con- straint

KW - Short-termism

M3 - Discussion paper

VL - 2009-86

T3 - CentER Discussion Paper

BT - Bankruptcy Law and Corporate Investment Decisions

PB - Microeconomics

CY - Tilburg

ER -

Tarantino ET. Bankruptcy Law and Corporate Investment Decisions. Tilburg: Microeconomics. 2009. (CentER Discussion Paper).