Fiduciary Duties and Equity-Debtholder Conflicts

Bo Becker and Per Stromberg

No 17661, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity-debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in firms incorporated in that state. This change limited managers' incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity-bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.

JEL-codes: G32 G33 H1 H10 L2 (search for similar items in EconPapers)
Date: 2011-12
Note: CF
References: View complete reference list from CitEc
Citations:

Published as Bo Becker & Per Strömberg, 2012. "Fiduciary Duties and Equity-debtholder Conflicts," Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1931-1969.

Downloads: (external link)
http://www.nber.org/papers/w17661.pdf (application/pdf)

Related works:
Journal Article: Fiduciary Duties and Equity-debtholder Conflicts (2012)
Working Paper: Fiduciary Duties and Equity-Debtholder Conflicts (2011)
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:nbr:nberwo:17661

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17661

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().