Fiduciary Duties and Equity-debtholder Conflicts
By Bo Becker, Per Strömberg. 2012
176 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/ce8170d892bc162f08c65fae6a9f21c433d13765
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Accounting
- Todd A. Gormley
- David A. Matsa
- Philip Valta
- G. Favara
- Erwan Morellec
- Enrique J. Schroth
- Adrien Matray
- Erik P. Gilje
In Finance
- Philip Valta
- Todd A. Gormley
- G. Favara
- David A. Matsa
- Erwan Morellec
- Enrique J. Schroth
- Adrien Matray
- Hadiye Aslan
Citations in the corpus
- Debt Enforcement, Investment, and Risk Taking Across Countries (2013, background): “The paper closest to ours in this literature is Becker and Stromberg (2012) .”
- Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts (2016, background): “Managerial preferences or the influence of other stakeholders? Employees and debt holders often also benefit when firms reduce risk (Matsa, 2010; Becker and Strömberg, 2012).”
- Accounting Conservatism and Firm Investment Efficiency (2016, unknown): “This firm would experience the debt equity conflicts that arise when firms are highly levered and might be at risk of insolvency, i.e., debt overhang and risk shifting problems (Myers, 1977; Jensen and Meckling, 1976; Becker and Strömberg, 2012).”