A number of authors have noted that when a firm issues risky debt in the absence of binding state-contingent contracts, the maximize-present-value rule becomes ambiguous. This paper shows that incomplete (asymmetric) information can explain why the firm will make value-maximizing decisions when...

The standard theory of capital structure argues that firms trade off the tax advantage of debt against ba nkruptcy costs. R. A. Haugen and L. W. Senbet (1978) pointed out that there is a problem with this theory: if bankruptcy involves deadweig ht costs, shareholders and bondholders have an...

The creditors' bargain view of insolvency law argues that solvency stats rights should be preserved in insolvency states. It argues that insolvency law should be an extension of commercial law. This paper examines the Insolvency Act (1986) in the United Kingdom from the perspective of the...

This paper shows that long-term contracts can be used in competitive financial markets to separate entrepreneurs of different abilities. In equilibrium, poor entrepreneurs are financed with a sequence of standard-debt contracts. Good entrepreneurs are financed with a modified contract in which...