Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules

Stanley D. Longhofer

No 9415, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: An analysis showing that allowing creditors to \"run\" on a firm in financial distress is socially valuable, since it compensates them for monitoring the firm's condition; in contrast, strict adherence to absolute and proportionate priority rules allows lenders to free ride on the monitoring efforts of others, exacerbating the firm's moral hazard problem.

Keywords: Bankruptcy (search for similar items in EconPapers)
Date: 1994
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