efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

does the bond market predict bankruptcy settlements this study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded i e usually junior claimants bondholders the data indicate that on average bondholders benefit albeit slightly from absolute priority rule apr violations this paper also examines the degree to which the bond market in the bankruptcy filing month anticipates departures from the apr and other influences on the payoff to bondholders in other words we investigate the informational efficiency of the market for bankrupt bonds overall despite the complex and lengthy nature of bankruptcy proceedings the results support efficiency the finance literature has traditionally assumed that when a firm enters bankruptcy the creditors become the owners and the value of the firm is distributed according to the absolute priority rule apr the apr states that senior creditors should be fully compensated before junior creditors receive any portion of the bankrupt firm s value and junior creditors should receive full payment before shareholders receive any compensation in practice formal bankruptcy proceedings are complex processes that often violate the apr brown 1989 captures some of the intricacies of this process in a game theoretic model showing that the solution to the bargaining process in bankruptcy can involve deviations from the apr although the solution

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

why is bank debt senior a theory of asymmetry and claim priority based on influence costs this theory can explain why bank debt is universally senior consistent with the presence of conflict lawyers and absolute priority violations in financial distress better organized banks would more strongly contest priority in financial distress if they were junior because deterrence can reduce creditors total expenses in a priority contest the ex post stronger lobbyist litigant should be senior ex ante for equivalent reasons the theory can advise when public debt should be senior to trade credit and or implicit contracts and can even suggest one rationale for the absolute priority rule apr this article further shows that chapter hi creditor reimbursement procedures can lower overall costs article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pollution claim settlements under private information abstract the classical problem of resolving a nuisance dispute between a pollution generating firm and nearby residents is modelled here as a mechanism design problem we assume that the designer of the mechanism is the firm that it is uncertain about the actual losses suffered by residents and that the initial assignment of property rights is one where each resident is entitled to prevail we derive a profitmaximizing scheme under the individual rationality and incentive compatibility constraints and examine its properties it is shown that the outcomes it yields are sometimes inefficient moreover when many residents are affected by pollution and the degree of uncertainty with respect to the losses they suffer is large these inefficiencies become rampant

evidence on the cross country transmission of monetary shocks the international transmission of monetary shocks between the us and canada is explored focusing on real variables such as consumption investment employment and the bilateral trade balance along with measures of us and canadian money the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries the long run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run the short run analysis provides strong evidence that us monetary shocks affect real activity in both the usa and canada the analysis also indicates that canadian monetary disturbances affect canadian and us real activity and that many of these effects are similar in magnitude to the effects of us monetary shocks the importance of the nominal exchange rate

can innovative reforms and practices efficiently resolve financial distress abstract the last few years have seen a phenomenal upsurge in the number of corporate bankruptcies the vulnerabilities that were lying dormant within contemporary bankruptcy regimes suddenly became apparent causing concerns within the international corporate community consequently researchers practitioners and policy makers from all over the world became actively engaged in emphasizing the importance of efficient bankruptcy reforms to promote a rescue culture the primary objective of an insolvency framework should be to provide quick transparent and cost effective solutions for resolving financial distress and promoting a synergetic environment conducive to the proliferation of healthy debt repayment practices increased trust factors between creditors and debtors and a better survival rate for viable businesses in this paper we present a qualitative review of various insolvency reforms introduced in several countries between 2005 and 2013 for efficiently resolving financial distress we delve into a discussion of the prevalent practice of resolving distress through the courts formal procedure or out of the courts private workout settlements the supporting literature and the limitations involved in the process overall our goal was to summarize and synthesize empirical data and highlight the strengths and weaknesses of the proposed insolvency reforms to provide a better understanding of common ways of resolving financial distress the data shows evidence that several countries have improved their bankruptcy ranking doing business reports by empowering creditors by expanding their rights under bankruptcy speeding up court procedures promoting out of court procedures and regulating insolvency practitioners lastly we adopt a normative approach by proposing a list of legal changes that should drive legislators actions in order to provide sustainable ways for resolving distress e g transparency early filling extension of floating charges electronic management of bankruptcy files etc

political power and the credibility of government debt abstract if political power and motives to invest in government bonds are positively correlated across voting groups then a self selection equilibrium can arise where the government s promise to repay its debt is credible we illustrate this using a formal model where the alternative use of wealth is to acquire human capital journal of economic literature classification numbers d72 e60 h63

the effect of bankruptcy protection on investment chapter 11 as a screening device asymmetric information and conflicts of interest between equity and debt holders can force a distressed but efficient firm to liquidate and may enable a distressed inefficient firm to continue in the extreme if it is costless for an inefficient firm to mimic an efficient firm in a debt restructuring efficient and inefficient firms are equally likely to continue or liquidate this article shows that chapter 11 procedures impose costs on ineffilcient firms that would otherwise mimic efficient firms this separation induces voluntary filing for bankruptcy by ineffilcient firms and consequently enables efficient firms to continue when they would otherwise be liquidated

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

does money matter the robustness of evidence from vector autoregressions traditionally empirical macroeconomic research begins with the use of theory to construct a highly restricted structural econometric model the determination of the nature of those restrictions is fraught with difficulty and thus many specification decisions turn out to be largely ad hoc and of dubious validity once these specification issues have been probably inadequately addressed and a structural model constructed it is then estimated using complicated econometric techniques requiring sophisticated computer programs recently an alternative approach to modeling macroeconomic time series has come into wide use this alternative introduced by sims 1980a 1980b suggests the use of vector autoregression var models to analyze time series relationships among macroeconomic variables the fact that the use of this approach has proliferated widely in a relatively brief period of time is due not only to the very persuasive criticisms of traditional methods made by sims see especially sims 1980a but perhaps even more to the perception that specification and estimation problems are greatly simplified the user of the var approach imposes few restrictions and can generally use ordinary least squares estimation procedures the var approach is thus believed to be largely free of the spurious specification assumptions and consequent specification errors necessitated by traditional macroeconometric procedures

the behavior of money and other economic variables two natural experiments abstract the object of this paper is to test the performance of the quantity theory model and the related proposition of monetary neutrality in a context in which to use bernanke s phraseology money move d for reasons that were plausibly unrelated to the current state of the economy we investigate this question using data from two recent episodes of monetary policy regime change the move to floating exchange rates throughout the industrialized world following the breakdown of bretton woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later the results of this exercise are highly positive the money price relationship that we observe is fully consistent with theory growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one to one relation to one another growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money the classical neutrality proposition in this context superneutrality in general receives strong though not totally unambiguous support

the exploitation of relationships in financial distress the case of trade credit this paper develops optimal pricing lending and renegotiation strategies for companies in relationships where one firm is highly dependent on the other long term trade creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors anticipating these larger renegotiation concessions not only do less financially stable firms prefer trade credit but all firms agree to pay a higher interest rate for trade credit the model also explains the existence of teaser interest rates and convenience classes findings are consistent with those of the relationship lending literature

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

the monetary approach to the exchange rate in this paper the monetary approach to the exchange rate is re examined for three key currencies using data for the recent experience with flexible exchange rates two important findings are reported in the paper first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analysing the long run exchange rate second we find inter alia that the proportionality of the exchange rate to relative money supplies is valid for the german mark

empirical analysis of macroeconomic time series var and structural models abstract var and structural econometric models have complementary roles in the modelling of macroeconomic time series a constant parameter var provided it is statistically well specified constitutes a valid basis for testing hypotheses of dynamic specification exogeneity and a priori structure thus facilitating model evaluation as well as suggesting a potentially efficient model development strategy deterministic e g trends and regime shifts and stochastic e g integrated variables non stationarities are analysable within this framework and the johansen maximum likelihood procedure for cointegrated systems is used in an analysis of the determination of earnings prices productivity and unemployment in the u k

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

the importance of incomplete information in explaining the existence of costly bankruptcy the standard theory of capital structure argues that firms trade off the tax advantage of debt against ba nkruptcy costs r a haugen and l w senbet 1978 pointed out that there is a problem with this theory if bankruptcy involves deadweig ht costs shareholders and bondholders have an incentive to renegotia te before it occurs since in this way bankruptcy and its costs can be avoided this implies costly bankruptcy will not occur and casts d oubt on the validity of the standard theory this paper uses noncoope rative bargaining theory to formally model this idea it then shows t hat if there is incomplete information costly bankruptcy can occur copyright 1987 by the review of economic studies limited

government turnover in parliamentary democracies in this paper we consider a dynamic model of government formation and termination in parliamentary democracies that accounts for the following phenomena 1 cabinet terminations due to replacement or early election 2 cabinet reshuf es 3 minority and surplus governments 4 the relative instability of minority governments

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

bankruptcy and agency costs their significance to the theory of optimal capital structure we support and generalize our original results 1978 in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy in the case of bankruptcy costs market impediments are easily elimi nated through the inclusion of simple provisions in corporate charters and bond inden tures further we demonstrate that recent attempts to link liquidation costs to capital structure are without merit if the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants arbitrage profits arise and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders also we find that the pure market solution is not readily generalizable to other classes of agency problems particularly the risk incentive problem how ever the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts in a previous paper 1978 we employed arbitrage arguments to show that in a well functioning market bankruptcy costs are an insignificant determinant of a firm s capital structure we also pointed out that the decision to liquidate and its associated costs can be separated from the event of bankruptcy moreover any costs actually associated with the event of bankruptcy must be limited to the costs associated with an informal reorganization of the capital structure in the capital market prior to default these results were argued to hold under a com plex environment with multiple periods multiple securities and heterogeneous expectations we concluded that bankruptcy costs would be a significant deter minant of capital structure only in the face of irrationality on the part of market participants or unavoidable impediments to the arbitrage process since the publication of our paper there has been an accumulation of the

risk and hedging do credit derivatives increase bank risk abstract the objective of this paper is to investigate whether financial innovation of credit derivatives makes banks more exposed to credit risk although credit derivatives are important for hedging and securitizing credit risk and thereby likely to enhance the sharing of such risk some commentators have raised concerns that they may destabilize the banking sector this paper investigates this issue in a simple model driven by costs of financial distress the analysis identifies two effects of credit derivatives innovation they enhance risk sharing as suggested by the hedging argument but they also make further acquisition of risk more attractive the latter effect if dominant can therefore destabilize the banking sector the critical factor is perhaps surprisingly the competitive nature of the existing underlying credit markets as these markets become more elastic the threat of destabilization increases the paper discusses issues related to bank regulation within the context of the model

valuing commercial mortgages an empirical investigation of the contingent claims approach to pricing risky debt this paper empirically investigates a contingent claims model of commercial mortgage pricing we find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent claims model in addition the model explains a significant proportion of the period to period changes in the default premia however given an assumed negative correlation between building value changes and interest rate changes the model s risk structure tends to increase less steeply with increasing maturity than the observed risk structure since the seminal work of black and scholes 1973 corporate liabilities have been modeled as options on the total value of the firm this contingent claims approach to bond pricing was refined by merton 1974 to allow for cash dispersals prior to the bonds maturities and by brennan and schwartz 1980 and ingersoll 1987 to allow for interest rate uncertainty although variants of these bond pricing models are currently being used extensively on wall street they have not been tested extensively moreover empirical studies have not successfully accounted for the observed spread between the rates on risky and default free debt jones mason and rosenfeld 1984 empirically investigate a model that assumes a nonstochastic term structure of interest rates while ramaswamy and sundaresan 1986 examine a model with stochastic interest rates to price floating rate notes in both cases the models could not explain the observed default premia the relative lack of empirical analysis is due partly to the complicated nature of corporate bonds major corporations generally have a large number of different bond issues outstanding that have different priorities in the event that the firm goes bankrupt moreover the bonds can have a variety of covenants specifying sinking fund provisions conditions under which technical default will occur and other restrictions that can have an impact on their value although these complications do not preclude pricing various bond issues on a case by case basis they make it difficult to test systematically the accuracy of the pricing model

the costs of inefficient bargaining and financial distress abstract this study provides the first large sample analysis of the stock market reactions to interfirm litigation when a suit is filed the common stock of the typical defendant declines by about 1 while the plaintiff experiences no significant gains for the average pair of firms the combined drop in value upon filing is 21 million much of the loss is regained if the suit is settled the findings suggest that bargaining among firm claimants sometimes leads to very inefficient outcomes part of the leakage is explained by the costs of increased financial distress imposed on the defendant

spillovers from good news and other bankruptcies real effects and price responses abstract we model debt restructurings that could endogenously end in bankruptcy and study spillovers to competitors operating decisions profits restructuring outcomes and security prices we show that while bankruptcy could cause the firm s share price to drop bankruptcy always signals good news about the firm we identify the conditions under which a bankruptcy also signals good news about competitors we demonstrate that when a firm s bankruptcy costs are relatively small bankruptcy raises its share price while lowering the prices of competitors shares and debt as well as boosting the probability that they will enter bankruptcy when there is little information asymmetry about the firm s prospects or the information asymmetry is about industry prospects bankruptcy raises competitors share and debt prices and lowers their probability of bankruptcy

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

do bondholders lose from junk bond covenant changes this article documents that firms can and do change the covenants of their public debt indentures through consent solicitations a game theoretic model shows that bondholders may consent to covenant changes even when it is not in their collective interest to do so despite this finding bondholder returns around solicitations are positive further analysis indicates that bondholders coordinate their actions to modify or defeat disadvantageous proposals and therefore can demand some of the gains resulting from covenant modifications the policy implication of this study is that bondholders may not need additional regulatory or judicial protection in the solicitation process copyright 1993 by university of chicago press

money and output under alternative exchange rate regimes in the usa abstract economic theory suggests that the effects of money on output will depend on the exchange rate regime this paper examines the relationship between money and output under fixed and flexible exchange rates in the usa johansen s maximum likelihood estimation method is utilized to test for cointegration in a system consisting of money the interest rate prices the trade balance and output during 1959 1971 and 1973 1990 with the exchange rate included in the analysis fo the second period the results indicate that the variables are cointegrated suggesting the existence of long run equilibrium relationships between the domestic and external variables vaiance decompositions reveal a much larger role for money in explaining forecast error vaiance of output during the flexible exchange rate period money and the interest rate explain a substantial proportion of the variances of the trade balance and the exchange rate this suggests that effects on the exchange rate and trade balance are an important component of the transmission mechanism of monetary policy jel f41

opportunistic underinvestment in debt renegotiation and capital structure abstract this paper models debt renegotiation as a bargaining game between debtholders and shareholder oriented management in which management credibly threatens to run down firm assets to force concessions from the creditors creditors anticipate this opportunistic behavior by management creating an upper bound on debt capacity that is less than the value of the firm if an advantage to debt is introduced such as favorable tax treatment an interior optimal capital structure obtains even in the absence of realized bankruptcy costs our model also explains variations in debt equity ratios and the use of certain puzzling debt covenants

litigation liability and incentives for care abstract in this paper potential injurers are subject to a negligence standard and differ in cost of taking care in the event of accident the injurer s degree of care is private information in litigation that follows award of damages for pain and suffering will lead to a general increase in care and hence reduce the likehood of accident a tighter negligence standard will lead some potential injurers to take more care and others to take less adoption of a rule under which the loser at trial must pay the litigation costs of the winner will reduce the pressure for punitive damages

a reconsideration of sims evidence concerning monetarism abstract in var systems such as those of sims 1980 monetary policy surprises may be more accurately represented by interest rate than money stock innovations especially if the monetary authority uses an interest rate instrument

the information content of distressed restructurings involving public and private debt claims abstract this paper examines debt restructurings by financially distressed firms we develop a model which predicts that in public debt exchange offers firms with unfavorable private information will offer equity claims to convince bondholders that the firm s prospects are poor in contrast offering equity to well informed private lenders conveys favorable private information to outsiders consistent with our analysis we find positive average abnormal returns around restructurings that offer equity to private lenders and senior debt to public debtholders and we find significant negative average abnormal returns when private lenders are offered senior debt and public lenders are offered equity

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

investment policy and exit exchange offers within financially distressed firms this article examines the conflict of interest between shareholders and bondholders in a setting in which firms can renegotiate the terms of existing debt with public debtholders in particular we consider one of the most common types of debt restructuring the exit exchange offer our analysis explores the relation between exitexchange offers and investment choice by the manager and it concludes that managers acting strategically on behalf of shareholders may select inefficient investment projects in order to enhance their bargaining position vis a vis creditors holding the upside potential of an investment project fixed managers shareholders prefer projects with lower payoffs in states of bankruptcy because it induces individual bondholders to accept poorer terms in a debt for debt exit exchange offer thus generating a greater residual for shareholders in states of solvency additionally we show how the investment inefficiencies in our analysis depend on i the inability of bondholders to coordinate their actions ii the ability of managers to commit to suboptimal investment projects and iii the coupling of an individual bondholder s decision to tender and her decision to consent to allow the firm to strip fiduciary covenants we suggest conditions under which a ban on coupled exit exchange offers or alternatively constraints on debt for debt exchanges would be efficiency enhancing

the effect of private antitrust litigation on the stock market valuation of the firm the authors study the implications for shareholder wealth of interfirm antitrust litigation and how the costs of the dispute affect the propensity to settle upon filing defendants experience significant wealth losses that are ten million dollars larger than the wealth gains of plaintiffs financial distress behavioral constraints and follow on suits are sources of wealth leakage and influence settlement behavior since the threat of a monetary transfer has little power to explain either wealth effects or the likelihood of settlement the central concern of defendants may be the potential prohibition of profitable business practices copyright 1995 by american economic association

reorganization in bankruptcy and the issue of strategic risk abstract the decision by creditors to force the firm into bankruptcy where bankruptcy includes reorganization is shown to involve the valuation of a lottery over cooperative games rather than a lottery over specific monetary outcomes in the absence of assumptions about strategic negotiating risk the value of creditor claims is seen to be ambiguous this paper extends van horne s model of the optimal initiation of bankruptcy proceedings to include the reorganization option and strategic risk a modified decision rule is obtained to determine the optimal solution

firm specific human capital amd optimal capital structure the authors consider the moral hazard in managers undersupplying imperfectly marketable firm specific human capital firms may cope by granting long term wage contracts that protect managers against employment termination although ex ante efficient these contracts may be ex post inefficient when managerial ability is discovered to be low precommitted firms must honor these contracts unless there is ownership transfer that permits their legal invalidation bankruptcy is one such transfer mechanism since managers anticipate the contractual consequence of bankruptcy leverage worsens moral hazard this cost provides a counterbalance to the debt tax shield and leads to an optimal capital structure copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the economic effects of restrictions on government budget deficits abstract in overlapping generations economies with perfect financial markets and lump sum taxation restrictions on the government budget deficit do not limit the set of achievable allocations for economies in which the tax instruments are distortionary and limited in number this strong form of irrelevance does not hold even if markets are perfect we propose a weaker but natural definition of irrelevance in which only a finite but arbitrarily large number of restrictions near the baseline deficit are considered we show that if the government can use only anonymous consumption taxes there is weak irrelevance of the deficit restrictions if the number of tax instruments is large relative to the number of policy goals journal of economic literature classification numbers d51 d91 e32

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

the effect of state foreclosure laws on loan losses evidence from the mortgage insurance industry this paper analyzes the effect of three major provisions of state foreclosure laws procedure redemption period and provision for deficiency judgment on loan losses as reflected in the claims paid by private mortgage insurers and the fha it also explores the significance of the incentive conflict between the lender and the insurer in terms of the presence or absence of a coinsurance relationship and the existence of a deficiency judgment the results demonstrate that foreclosure laws have a significant effect on loan losses and that the existence of a deficiency judgment affects the incentive conflict between lender and insurer copyright 1990 by ohio state university press

resolution of financial distress under chapter 11 abstract we develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the u s bankruptcy procedure known as chapter 11 shareholders and two classes of creditors senior and junior alternatively propose a reorganization plan subject to a vote the bankruptcy judge can intervene in any renegotiation round to impose a plan the multiple stage bargaining process is solved in a non cooperative game theory setting the calibrated model yields the liquidation rate the duration of chapter 11 and the frequency of deviations from the absolute priority rule which are consistent with empirical evidence

cointegration tests of a long run relation between money demand and the effective exchange rate abstract for the period starting with the floating of the us dollar we find evidence that long run stationarity of the demand function for m2 but not m1 requires inclusion of the effective exchange rate these results lend some support to mckinnon s hypothesis that nonstationarity in the demand for money can be resolved by inclusion of the exchange rate jel f41 e41

is chapter 11 costly abstract we examine a sample of 459 firms filing for chapter 11 during the period 1991 1998 and find that our sample firms experience significant improvements in their operating performance during chapter 11 our evidence is consistent with the hypothesis that chapter 11 if anything provides net benefits to bankrupt firms in the cross section firms with higher debt ratios experience greater improvements in operating performance and the complexity of the renegotiation process negatively affects the improvement we find no relationship between chapter 11 outcome and changes in risk adjusted firm value in chapter 11

limits of markets and limits of governments an introduction to a symposium on political economy abstract this introduces the journal of economic theory symposium on political economy journal of economic literature classification number p16

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

ex ante costs of violating absolute priority in bankruptcy 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 favor risky projects as well as with respect to borrowing and dividend decisions