Post by Bo Becker and Per Strmberg on Jan 13, 2012 11:05:24 GMT 4
Fiduciary Duties and Equity‐Debtholder Conflicts
Bo Becker
Harvard Business School; National Bureau of Economic Research (NBER)
Per Strömberg
Stockholm School of Economics; University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); Stockholm School of Economics - Department of Finance
November 30, 2011
Harvard Business School Finance Working Paper No. 10-070
Abstract:
We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity-debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors’ fiduciary duties in firms incorporated in that state. This change limited managers’ incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity-bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1968638_code698198.pdf?abstractid=1555660&mirid=2
Bo Becker
Harvard Business School; National Bureau of Economic Research (NBER)
Per Strömberg
Stockholm School of Economics; University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); Stockholm School of Economics - Department of Finance
November 30, 2011
Harvard Business School Finance Working Paper No. 10-070
Abstract:
We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity-debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors’ fiduciary duties in firms incorporated in that state. This change limited managers’ incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity-bond holder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1968638_code698198.pdf?abstractid=1555660&mirid=2
