Incentive-compatibility, limited liability and costly liquidation in financial contracting

• 成果类型: Article
• 署名作者: Gui, Zhengqing; von Thadden, Ernst-Ludwig; Zhao, Xiaojian
• 署名单位: Wuhan University; University of Mannheim; Centre for Economic Policy Research - UK; Monash University; The Chinese University of Hong Kong, Shenzhen
• 刊物名称: GAMES AND ECONOMIC BEHAVIOR
• ISSN/ISSBN: 0899-8256
• DOI: 10.1016/j.geb.2019.09.011
• 发表日期: 2019
• 页码: 412-433
• 关键词: Financial contracting; Incentive-compatibility; limited liability; Indivisible collateral; Costly liquidation

摘要

This paper studies a financial contracting problem where a firm privately observes its cash flow and faces a limited liability constraint. The firm's collateral is piecemeal divisible and can only be liquidated continuously by resorting to the service of a costly third party, typically associated with bankruptcy. In this situation, multi-class collateralized debt is optimal, in which the firm makes several debt-like promises with a seniority structure. The decision over continuous and piecemeal liquidation depends on both the cost of introducing the third party and the firm's funding need. Allowing the firm to refinance ex-post through surreptitious liquidation may reduce the firm's ex-ante payoff, consistent with covenants in debt contracts prohibiting the sale of assets. (C) 2019 Elsevier Inc. All rights reserved.