This paper examines the implications of bankruptcy law for owner managed firms. In this setting, we then examine the role of capital contributions by the manager, when his required return is increasing in the amount that he contributes. We consider both the case of symmetric and asymmetric information about the manager's ability to contribute such capital. Such infusions are shown to provide superior outcomes to both creditor financing and external financing.
Creditors are better off because of the impact of the infusions on the incentives of the manager.
As a consequence, deviations from APR are less severe than they would have been in the absence of these infusions. Moreover, some firms that would have been liquidated in the absence of such capital contributions are now able to continue operations. These results suggest that the current debate over the optimal design of bankruptcy procedures should address the role for capital contributions by owner managers as well.