Working Paper Series, Department of Finance, Copenhagen Business School
Shubhashis Gangopadhyay and Clas Wihlborg
The Impact of Bankruptcy Rules on Risky Project Choice and Skill Formation under Credit Rationing
Abstract: The contribution of this paper is in emphasizing
endogenous credit rationing in the
analysis of effects of bankruptcy
rules on entrepeneursí decisions with respect to risk-taking
ante skill-development. Unlike most of the literature, both the debt claim
and the amount of debt financing is endogenous in our exercise. This
allows us to
determine the extent of credit rationing that banks use to
tackle informational asymmetry.
Credit rationing is non-trivial and
increases the cost of capital when corporations are
forced to access
alternative sources of funding even when debt is a cheaper alternative.
We thus solve for optimal debt-equity ratios in the capital structure of
the corporation and
entrepeneursí risk-taking. Second, we allow
entrepeneurs to invest in generating skill to
handle risky projects. We
show that bankruptcy policies are important determinants of
outcomes in ways that in some cases contradict the existing literature,
does not consider endogenous credit rationing.
Keywords: credit rationing; Bankruptcy rules; Financing; (follow links to similar papers)
JEL-Codes: A10; (follow links to similar papers)
32 pages, August 1, 2001
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Lars Nondal ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom