Coase-Sandor Working Paper Series in Law and Economics
Publication Date
1993
Publication Title
Law & Economics Working Papers
Abstract
Bankruptcy rules often enable equityholders to obtain value even though debtholders are not paid in full. This paper addresses the ex ante effects of violations of absolute priority. These violations should influence decisions concerning project choice and human capital investment that determine the extent to which a firm?s managers have an advantage over others in operating the firm?s assets. In an absolute priority regime, managers will ?entrench? themselves by overinvestment in assets that require their unique skills. Managers will also underinvest in firm-specific human capital. Allowing ex post violations of absolute priority decreases the severity of these two problems.
Number
16
Recommended Citation
Randal C. Picker & Lucian Arye Bebchuk, "Bankruptcy Rules, Managerial Entrenchment, and Firm-Specific Human Capital" (Coase-Sandor Institute for Law & Economics Working Paper No. 16, 1993).
Additional Information
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