Optimal financial contracts for large investors: the role of lender liability

No 00-1, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper explores the optimal financial contract for a large investor with potential control over a firm's investment decisions. The authors show that an optimally designed menu of claims for a large investor will include features resembling a U.S. version of lender liability doctrine, equitable subordination. This doctrine permits a firm's claimants to seek to subordinate a controlling investor's financial claim in bankruptcy court, but only under well-specified conditions. Specifically, the authors show that this doctrine allows a firm to strike an efficient balance between two concerns: (i) inducing the large investor to monitor, and (ii) limiting the influence costs that arise when claimants can challenge existing contracts in bankruptcy court. ; The paper also provides a partial rationale for a financial system in which powerful creditors do not generally hold blended debt and equity claims.

Keywords: Bank loans; Bank investments; Venture capital (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-fin, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... pers/2000/wp00-1.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Working Paper: Optimal Financial Contracts for Large Investors: The Role of Lender Liability (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:00-1

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().