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Attar, Andrea, Casamatta, Catherine
, Chassagnon, Arnold and Décamps, Jean-Paul
(2010)
Multiple Lenders, Strategic Default and the Role of Debt Covenants.
, Toulouse
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Abstract
We study capital markets subject to moral hazard when investors cannot prevent side trading, thereby facing an externality if firms raise funds from multiple sources. We analyze whether investors’ ability to design financial covenants that may include exclusivity clauses mitigates this externality. Following covenant violations, investors can accelerate the repayment of their loan, adjust its size, or increase interest rates. Enlarging contracting opportunities generates a severe market failure: with covenants, equilibria are indeterminate and Pareto ranked. We show that an investors-financed subsidy scheme to entrepreneurs alleviates the incentive to overborrow and sustains the competitive allocation as the unique equilibrium one.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Language: | English |
| Date: | October 2010 |
| Place of Publication: | Toulouse |
| Uncontrolled Keywords: | Side Trading, Financial Covenants, Nonexclusive Competition, Strategic Default |
| JEL Classification: | D43 - Oligopoly and Other Forms of Market Imperfection D82 - Asymmetric and Private Information G33 - Bankruptcy; Liquidation |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse), TSM Research (Toulouse) |
| Institution: | Université Toulouse 1 Capitole |
| Site: | UT1 |
| Date Deposited: | 05 Nov 2015 15:13 |
| Last Modified: | 02 Apr 2021 15:50 |
| OAI Identifier: | oai:tse-fr.eu:23437 |
| URI: | https://publications.ut-capitole.fr/id/eprint/18577 |
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- Multiple Lenders, Strategic Default and the Role of Debt Covenants. (deposited 05 Nov 2015 15:13) [Currently Displayed]
