Contractual resolutions of financial distress

Nicola Gennaioli and Stefano Rossi

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In a financial contracting model, we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes co-exist - one class fully concentrated and with control rights upon default, the other dispersed and without control rights - removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. Our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.

Keywords: Financial Distress; Investor Protection; Financial Contracting (search for similar items in EconPapers)
JEL-codes: G33 K22 (search for similar items in EconPapers)
Date: 2006-11, Revised 2012-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Contractual Resolutions of Financial Distress (2015)
Journal Article: Contractual Resolutions of Financial Distress (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1316

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