Fiduciary duties and equity-debtholder conflicts
By: Bo Becker, Per Strömberg
Contributors: Strömberg, Per; Harvard Business School
Edition: 2nd rev.
Series: Working paper / Harvard Business School -- 10-070; Working paper (Harvard Business School) -- 10-070.
Publisher: Harvard Business School
Published: 2011
Place of publication: [Boston]
Language: eng
Number of pages: 52
Description: 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.
Notes: "February 2010, revised June 2011, November 2011" -- Publisher's website.

"November 30, 2011" -- added t.p.

Previously published as "Equity-debtholder conflicts and capital structure"

Includes bibliographical references.