Journal of Financial Intermediation Vol. 10 No. 2 2001
Lender Liability and Large Investors
Abstract
We explore the optimal financial contract for a large investor with potential control over a firm's investment decisions. An optimal menu of claims resembles a U.S. version of lender liability doctrine—equitable subordination. This doctrine permits the court to subordinate a controlling investor's claim in bankruptcy, but only under well-specified conditions. It allows a firm to strike an efficient balance between: (i) inducing the large investor to monitor, and (ii) limiting the influence costs that arise when claimants can challenge existing contracts. We provide a partial rationale for a financial system in which powerful creditors do not hold blended debt and equity claims. Journal of Economic Literature Classification Numbers: G20, G33, K22.
- DOI
- 10.1006/jfin.2001.0312
- Volume
- 10
- Issue
- 2
- Pages
- 108-137
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref