This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.

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Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?

This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1991.tb03753.x

The Theory of Capital Structure

We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. WVhen a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s. How DO FIRMS CHOOSE debt levels, and why do firms or even whole industries sometimes change how much debt they have? Why, for example, have American firms increased their leverage in the 1980s (Bernanke and Campbell (1988), Warshawsky (1990)), and why has this debt increase been the greatest in some industries, such as food and timber? Despite substantial progress in research on leverage, these questions remain largely open. In this paper, we explore an approach to debt capacity based on the cost of asset sales. We argue that the focus on asset sales and liquidations helps clarify the crosssectional determinants of leverage, as well as why debt increased in the 1980s. Williamson (1988) stresses the link between debt capacity and the liquidation value of assets. He argues that assets which are redeployable-have alternative uses-also have high liquidation values. For example, commercial land can be used for many different purposes. Such assets are good candidates for debt finance because, if they are managed improperly, the manager will be unable to pay the debt, and then creditors will take the assets away from him and redeploy them. Williamson thus identifies one important determinant of liquidation value and debt capacity, namely, asset redeploya

/pdf/liquidation-values-and-debt-capacity-a-market-equilibrium-7ngp11zxlr.pdf

Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Consider an entrepreneur whocneeds to raise funds from an investor, but cannot commit not to withdraw his human capital from the project The possibility of a default or quit puts an upper bound on the total indebtedness from the entrepreneur to the investor at any date We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets Our results are consistent with the conventional wisdom about what determines the maturity structure of (long-term) debt contracts(This abstract was borrowed from another version of this item)

A Theory of Debt Based on the Inalienability of Human Capital

Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts.

/pdf/a-theory-of-debt-based-on-the-inalienability-of-human-4oy72z17as.pdf

A theory of debt based on the inalienability of human capital

We argue that long-term debt has a role in controlling management's ability to finance future investments. A company with high (widely-held) debt will find it hard to raise capital, since new security holders will have low priority relative to existing creditors. Conversely for a company with low debt. We show there is an optimal debt-equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments. We derive conditions under which equity and a single class of senior long-term debt work as well as more complex contracts for controlling investment behavior.

/pdf/debt-and-seniority-an-analysis-of-the-role-of-hard-claims-in-1mvemc4i6q.pdf

Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management

Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of (long-term) debt contracts.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w3906.pdf?abstractid=474008

We propose a new bankruptcy procedure. Initially, a firm's debts are cancelled, and cash and non-cash bids are solicited for the 'new" (all-equity) firm. Former claimants are given shares, or options to buy shares, in the new firm on the basis of absolute priority. Options are exercised once the bids are in. Finally, a shareholder vote is taken to select one of the bids. In essence, our procedure is a variant on the U.S. Chapter 7, in which non-cash bids are possible; this allows for reorganization. We believe our scheme is superior to Chapter 11 since it is simpler, quicker, market-based, avoids conflicts, and places appropriate discipline on management.

/pdf/the-economics-of-bankruptcy-reform-5mjuobcm8u.pdf

John Moore

Papers

A Theory of Debt Based on the Inalienability of Human Capital

A theory of debt based on the inalienability of human capital

Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management

A Theory of Debt Based on the Inalienability of Human Capital

The Economics of Bankruptcy Reform