The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Ex Ante Costs of Violating Absolute Priority in Bankruptcy
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00427
Lucian Arye Bebchuk
A basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority. Research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects. In contrast, this paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders. Such deviations aggravate the moral hazard problem with respect to project choice‐increasing the equityholders incentive to favor risky projects‐as well as with respect to borrowing and dividend decisions.
Do Short‐Term Objectives Lead to Under‐ or Overinvestment in Long‐Term Projects?
Published: 06/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04735.x
LUCIAN ARYE BEBCHUK, LARS A. STOLE
We examine managerial investment decisions in the presence of imperfect information and short‐term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long‐run projects. We show that short‐term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long‐run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.