Bankruptcy law and financial structure: the impact of managerial incentives

Ansgar Wohlschlegel

Research output: Contribution to journalArticlepeer-review


Providing the manager of a firm with suitable incentives to act in the investors' interest may be socially efficient, but not individually rational for the investors themselves. This paper specifies a second-best arrangement and shows how investors can be induced to implement it by means of an optimal bankruptcy code in the case where only standard financial contracts are available. It explains why bankruptcy law should, in some states of nature, let shareholders and senior creditors decide jointly, and provides a rationale for the existence of junior debt, which never enjoys any power of decision.
Original languageEnglish
Pages (from-to)333-345
Number of pages13
JournalThe European Journal of Finance
Issue number4
Publication statusPublished - 2006


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