Working Paper
Financial contracts and the legal treatment of informed investors
Abstract: The authors explore the economic rationale for equitable subordination, a legal doctrine that permits a firm's claimants to seek to subordinate an informed investor's financial claim in bankruptcy court. Fear of equitable subordination is often cited as a reason that banks in the U.S. are wary of taking an active management role in their borrowing firms. The authors show that an optimally designed menu of claims for a large investor will include features that resemble equitable subordination. The authors' model provides a partial rationale for a financial system in which powerful creditors do not generally hold blended debt and equity claims.
Keywords: Bankruptcy;
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File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/1999/wp99-8.pdf
Authors
Bibliographic Information
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 1999
Number: 99-8