Public Policy toward Bankruptcy: Me-First and Other Priority Rules

Michelle J. White

107 citations0/0 files storedThe Bell Journal of Economics

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Corporate Insolvency and Governance Corporate Finance and Governance Law, Economics, and Judicial Systems

Abstract

This article analyzes the economic efficiency properties of bankruptcy liquidation rules, including both conventional legal rules and the me-first rule proposed by economists. It also examines the incentives of firms to undertake investment projects when bankruptcy is a possible outcome. The results show that none of the rules leads to private investment incentives which are socially efficient. Depending on circumstances, it may be privately profitable to liquidate firms which should be continued or to continue firms which should be liquidated. Investments in low productivity projects may be approved while worthwhile projects may be abandoned. Public policy implications are considered.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1977Determinants of corporate borrowing 1977BANKRUPTCY, SECURED DEBT, AND OPTIMAL CAPITAL STRUCTURE 1978THE INSIGNIFICANCE OF BANKRUPTCY COSTS TO THE THEORY OF OPTIMAL CAPITAL STRUCTURE 1978The Bankruptcy Decision 1975CORPORATE BANKRUPTCY AND CONGLOMERATE MERGER 1972Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Reply

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