Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders

Hubert de La Bruslerie and Simon Gueguen
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Simon Gueguen: THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université

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Abstract: Debt is analyzed in relation to the conflict between three parties, a controlling shareholder, outside investors and creditors. We follow Jensen and Meckling's (1976) and Myers' (1977) intuitions that leverage may result in excess value appropriation by creditors while at the same time acting to discipline private benefits appropriation. Creditors' holdup refers to the appropriation by the incumbent debtholders of a large part of the additional value created by an incentivized controlling shareholder. This paper introduces a negotiation framework between controlling and outside shareholders in which releveraging and private benefits are decided while the process of value creation initiates a transfer of value to the creditors. The admissible contracts of control involve a minimum jump in leverage. This result gives a theoretical foundation for the leveraged recap decisions observed in the market and one-off variations of the capital structure.

Keywords: Creditors’ holdup; Private benefits; Controlling shareholder; Debt leverage; Releveraging; Corporate governance (search for similar items in EconPapers)
Date: 2021
Note: View the original document on HAL open archive server: https://hal.science/hal-03366329v1
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Citations: View citations in EconPapers (1)

Published in International Review of Law and Economics, 2021, 68

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Journal Article: Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders (2021)
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