Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Managerial Risk-Taking

Lambrecht, Bart M.; Tse, Alex S. L.

doi:10.2139/ssrn.3123170

Cited by 5 publications

(7 citation statements)

References 46 publications

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“…Mainstream finance literature often studies payout policy and capital structure decision separately but not their joint interaction, as highlighted by Lambrecht and Myers (2012). The economic foundation of our model is based on Lambrecht and Myers (2017) and Lambrecht and Tse (2018) where investment and payout policy are examined together in an inter-temporal investment/consumption model. Although our exposition assumes perfect coordination between managers and investors, the same modeling framework can be directly applied to an agency setup driven by utility maximization of self-interested risk averse managers (see Remark 2 in Section 2).…”

Section: Introductionmentioning

confidence: 99%

Dividend policy and capital structure of a defaultable firm

Tse

2020

Mathematical Finance

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Default risk significantly affects the corporate policies of a firm. We develop a model in which a limited liability entity subject to Poisson default shock jointly sets its dividend policy and capital structure to maximize the expected lifetime utility from consumption of risk averse equity investors. We give a complete characterization of the solution to the singular stochastic control problem. The optimal policy involves paying dividends to keep the ratio of firm's equity value to investors' wealth below a critical threshold. Dividend payout acts as a precautionary channel to transfer wealth from the firm to investors for mitigation of losses in the event of default. Higher the default risk, more aggressively the firm leverages and pays dividends.

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Section: Introductionmentioning

confidence: 99%

Dividend policy and capital structure of a defaultable firm

Tse

2020

Mathematical Finance

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“…For instance,Gropp et al (2010) argue that there is no evidence that public guarantees increase the protected banks' risk-taking, except for banks that have outright public ownership. In this regard,Lambrecht and Tse (2019) recently propose a theoretical model where, even without considering to role of bailouts at containing systemic risk, from a micro-prudential perspective, banks create the most value net of any recapitalization costs under bailout regimes.Electronic copy available at: https://ssrn.com/abstract=3712211…”

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confidence: 99%

Recapitalization, Bailout, and Long-run Welfare in a Dynamic Model of Banking

Modena

2020

SSRN Journal

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This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is ine cient because agents do not internalize the e↵ects banks' capitalization over the allocation of capital, its price and, in turn, firms investments.It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path. (JEL D51, G21)

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“…By contrast, when a bail-in has a high conversion ratio, i.e., the stockholders are highly diluted, both empirical(Giuliana, 2019) and theoretical(Lambrecht and Tse, 2019) papers suggest that bail-in debt increases market discipline.…”

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Banks Risk Taking and Creditors Bargaining Power

2019

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We study the influence of unsecured debt (subdebt) and of bail-in debt on banks' risk-taking in a contingent claim model, while considering the bargaining between stockholders and debtholders. We show that replacing stock with subdebt: (1) leads to fewer risk-shifting events, but generates a higher level of risk when stockholders have strong bargaining power, and (2) does not affect asset risk when side-payments are possible. Further, severe regulatory corrective measures might have adverse effects on risk-shifting. Finally, in a bank with bail-inable debt, an increase in debt write-down increases the magnitude, yet decreases the likelihood, of risk-shifting events.

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Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Managerial Risk-Taking

Cited by 5 publications

References 46 publications

Dividend policy and capital structure of a defaultable firm

Dividend policy and capital structure of a defaultable firm

Recapitalization, Bailout, and Long-run Welfare in a Dynamic Model of Banking

Banks Risk Taking and Creditors Bargaining Power

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