This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

This paper investigates whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms are efficiently reorganized and the assets of unproductive firms are effectively redeployed. We argue that incentives to reorganize depend on the level of demand and industry conditions. Using plant-level data, we find that Chapter 11 status is much less important than industry conditions in explaining the productivity, asset sales, and closure conditions of Chapter 11 bankrupt firms. This suggests that firms that elect to enter into Chapter 11 incur few real economic costs. A KEY QUESTION IN CORPORATE FINANCE LITERATURE is whether Chapter 11 bankruptcy provides a mechanism by which insolvent firms can be efficiently reorganized and the assets of unproductive firms effectively redeployed. Several studies have identified possible costs and benefits associated with Chapter 11 bankruptcy reorganizations. Of these costs, indirect or real costs represent a deadweight loss and are therefore considered most significant. 1 In this paper, we examine the importance of these costs and the effect of plant-level efficiency, firm characteristics, and industry demand on the decisions to redeploy assets or close manufacturing plants in bankruptcy. Our approach differs in two ways from previous studies. First, our empirical de-

A frictionless, structural view of default has the unrealistic implication that recovery rates on bonds, measured at default, should be close to 100 percent. This suggests that standard “frictions ” such as default delays, corporate-valuation jumps, and bankruptcy costs may be important drivers of recovery rates. A structural view also suggests the existence of nonlinearities in the empirical relationship between recovery rates and their determinants. We explore these implications empirically and find direct evidence of jumps, and also evidence of the predicted nonlinearities. In particular, recovery rates increase as economic conditions improve from low levels, but decrease as economic conditions become robust. This suggests that improving economic conditions tend to boost firm values, but firms may tend to default during particularly robust times only when they have experienced large, negative shocks.

Firm value is influenced in many direct and indirect ways by financial risks, which consist of unexpected changes of foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities is, however, only an indication of the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management at the firm level (as opposed to risk management by stock owners) represents a means to increase firm value to the benefit of the shareholders.

Do bankrupt firms affect their competitors in a causal manner? Theoretical considerations suggest contagion effects by which one firm’s bankruptcy affects other industry participants. However, identifying a causal link from bankruptcy filings by some players in an industry to their solvent non-bankrupt competitors is difficult since bankruptcy fillings are potentially correlated with the state of the industry. Using transaction prices of secured debt tranches issued by U.S. airlines, we identify a causal link from bankrupt airlines to the cost of debt capital of non-bankrupt airlines. We use the term ‘collateral channel ’ to describe this effect. Using detailed information about the underlying collateral of every tranche in our data, we identify the ‘collateral channel ’ off of both the time-series variation of bankruptcy fillings by airlines, and the cross-sectional variation in the overlap between the aircraft types in the collateral of a specific debt tranche and the aircraft types operated by bankrupt airlines. Analyzing the differential impact of an airline’s bankruptcy on the price of tranches which are secured by aircraft of different model types, we find that increases in the number of bankrupt potential buyers is indeed associated with lower tranche prices of other airlines. The ‘collateral channel ’ effect is stronger for less profitable airlines and more junior tranches. JEL classification: G24 G32 G33

This paper discusses different aspects of the notion of systemic risk. It contains a selective survey of the research on related topics, a review of some case studies of financial crises and failures, and a discussion pointing toward the importance of moral hazard as a key element of systemic risk. The main ideas studied are the links between capital structure theory and bank capital regulation, and moral hazard and agency theory at the level of the individual trader, the financial firm, and the overall financial system. Another important idea is the codetermination of asset prices and bank solvency. My main focus is on moral hazard as a potentially fruitful area for future research. Although existing research emphasizes the powerful propagation mechanisms whereby a small initial shock can be amplified by the financial system, I suggest that moral hazard, together with leverage at the level of the individual firm, can cause a large shock to the financial system.

Abstract not found

patterns in deviations from absolute priority rules in bankruptcy

Recently a number of researchers have attempted to employ the market model to estimate systematic risk (i.e., beta) for bonds. In this study we reviewed theoretical evidence which suggests bond betas can be expected to be nonstatlonary. This nonstationarity is a function of the duration of a bond, the standard deviation of the change in the yield to maturity of a bond relative to the standard deviation of the return on the market portfolio, and the correlation betv7een the change in the yield to maturity of a bond and the return on the market portfolio. Hotjever, all bonds will not necessarily have nonstatlonary betas in a given time period since it is possible that these factors may occasionally counteract one another. Empirical tests indicated that over 80 percent of the bonds ejc» amined had nonstatlonary betas. The primary factor differentiating bonds with nonstatlonary betas from those with stationary betas was the substantially higher relative standard deviation in the change in the yield to maturity for bonds with nonstatlonary betas. The larger standard deviation was caused by the higher average coupon rates and yields to maturity for bonds \rLth nonstatlonary betas. The theoretical and empirical results of this study indicate bond betas, in general, tend to be nonstatlonary. Hence, further use of them appears to be of very questionable value. THE NONSTATIONARITY OF SYSTEMATIC RISK FOR BONDS