Bankruptcy law, asset substitution problem, and creditor conflicts

Fonte: http://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6V7M-46H7TY2-1-... [2]
Acesso em: 28 out. 2009.

We argue that there may be an additional goal of bankruptcy law to mitigate possible conflicts of
interest among senior and junior debt. If a firm is heavily in debt, senior and junior debt can be affected
differently by changes in firm?s risk. The senior creditor tends to lose by risk-increasing, the junior
creditor tends to lose by risk-decreasing. The entrepreneur and one creditor could cooperate and change
investment policy jointly to the cost of the remaining creditor (coalition problem). This might even
work, if asset substitution is not efficient. We ask, whether there are counterbalancing provisions of
bankruptcy law which mitigate coalition problems. Deviations from absolute priority in Chapter 11 of
the U.S. Bankruptcy Code tend to complicate the forming of coalitions, since the entrepreneur usually
receives quite a large return without coalition.With respect to Germany, the Bankruptcy Code provides
more outside options to the creditors, thereby defining threat points. This makes it also more difficult
to form coalitions.
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