The Bankruptcy Decision and Debt Contract Renegotiations

We consider the bankruptcy law and workout practices in the United States and model bankruptcy as a strategic decision. We analyze a firm's choice between liquidation under Chapter 7, renegotiation of the debt contract in a workout, and reorganization under Chapter 11 of the bankruptcy code. Our premise is that a financially distressed firm chooses its action in order to minimize the loss in value caused by the well-known over- and under-investment problems. We show that the firm initiates a workout when it faces under-investment, and commences Chapter 11 when it faces over-investment. Some of the results are: (i) in default, total firm value and equity value increase upon the announcement of a workout and decrease upon the announcement of Chapter 11; (ii) firms with shorter maturity of debt are more likely to reorganize in a workout; (iii) among the firms that renegotiate their debt contract, the proportion of firms entering Chapter 11 is higher for firms in mature industries than for firms in growth industries.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/42726/1/10679_2004_Article_159965.pd

Value reducing defensive strategies in takeovers : do they improve shareholder welfare?

http://deepblue.lib.umich.edu/bitstream/2027.42/35397/2/b1408859.0001.001.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/35397/1/b1408859.0001.001.tx

The Role of white knight agreements, lock ups and spin-offs in takeovers

http://deepblue.lib.umich.edu/bitstream/2027.42/35396/2/b1408975.0001.001.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/35396/1/b1408975.0001.001.tx

Implicit Labor Contracts to Explain Turnover.

Aggregate data exhibit procyclical movement in the rate of turnover. However, existing models of turnover have been unable to explain this phenomenon. In this model the author generates turnover as an outcome of a second-best wage contract when there is asymmetry of information about workers' mobility costs. A wage contract that insures the "bad" ("unlucky") workers results in "good" ("lucky") workers earning less than their marginal productivity. Therefore, good workers with low mobility costs leave the firm for the spot market wage. This, combined with an aggregate shock, results in a procyclical rate of turnover. Copyright 1986 by University of Chicago Press.

Why the NPV Criterion does not Maximize NPV

This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem. Copyright 2004, Oxford University Press.