The paradox of alignment: agency problems and debt restructuring

Sarah Paterson

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Traditional agency theory predicts that when a large company is trading solvently shareholders will align their interests with those of the directors, but that this may also mean that when the company is financially distressed directors will prefer shareholder interests to those of the creditors ( even if there is no residual value for the shareholders in the company). Both the law and the market respond to this problem, and to date the situation has been held in some sort of approximate balance. However, this article examines the consequences of alignment of shareholder and director interests when a large private equity company is in financial distress, in light of the debt restructuring which is likely to be in contemplation and the type of director who is often retained. It argues that in these cases directors may have an incentive to support creditors’ debt restructuring plans and, paradoxically, the closer the alignment of their interests and those of the shareholders when the company is trading solvently, the greater this incentive to prefer creditors may be (even if there is stilla residual interest for the shareholders in the company). The implications of this for the law and forthe market are explored.

Keywords: director's duties; insolvency; debt restructuring; board composition; private equity; law and finance (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2016-12-01
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in European Business Organization Law Review, 1, December, 2016, 17(4), pp. 497-521. ISSN: 1566-7529

Downloads: (external link)
http://eprints.lse.ac.uk/65327/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:65327

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().