Ex Ante Costs of Violating Absolute Priority in Bankruptcy

Lucian Bebchuk ()

No 2914, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority. Research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects. In contrast, this Paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders. Such deviations aggravate the moral hazard problem with respect to project choice increasing the equityholders' incentive to favour risky projects as well as with respect to borrowing and dividend decisions.

Keywords: Bankruptcy; Chapter 11; Corporate reorganizations; Workouts; Absolute priority; Moral hazard; Asset dilution; Claim dilution (search for similar items in EconPapers)
JEL-codes: G33 K20 K22 (search for similar items in EconPapers)
Date: 2001-08
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Citations: View citations in EconPapers (3)

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Working Paper: Ex Ante Costs of Violating Absolute Priority in Bankruptcy (2001)
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