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Covenants and Third-Party Creditors - Empirical and Law & Economics Insights Into a Common Pool Problem (Hardcover, 1st ed. 2017)
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Covenants and Third-Party Creditors - Empirical and Law & Economics Insights Into a Common Pool Problem (Hardcover, 1st ed. 2017)
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This book adds to the debate on the effects of covenants on
third-party creditors (externalities), which have recently become a
focus of discussion in the contexts of bankruptcy law, corporate
law and corporate governance. The general thrust of the debate is
that negative effects on third-party creditors predominate because
banks act in their own self-interest. After systematising the
debated potential positive and negative externalities of covenants,
the book empirically examines these externalities: It investigates
the banks' factual conduct and its effects on third-party creditors
in Germany and the US. The study's most significant outcome is that
it disproves the assumption that banks disregard third-party
creditors' interests. These findings are then interpreted with the
tools of economic analysis; particularly, with the concept of
common pool resources (CPRs). Around the aggregated value of the
debtor company's asset pool (as CPR) exists an n-person prisoner's
dilemma between banks and third-party creditors: No creditor knows
when and under what conditions the other creditor will appropriate
funds from the debtor company's asset pool. This coordination
problem is traditionally addressed by means of bankruptcy law and
collaterals. However, the incentive structure that surrounds the
bilateral private governance system created by covenants and an
event of default clause (a CPR private governance system) is found
to also be capable of tackling this problem. Moreover, the
interaction between the different regulation spheres - bankruptcy
law, collateral and the CPR private governance system has important
implications for both the aforementioned discussions as well as the
legal treatment of covenants and event of default clauses.
Covenants alone cannot be seen as an alternative to institutional
regulation; the complete CPR private governance system and its
interaction with institutional regulation must also be taken into
consideration. In addition, their function must first find more
acceptance and respect in the legal treatment of covenants and
event of default clauses: The CPR private governance system fills a
gap in the regulation of the tragedy of the commons by bankruptcy
law and collateral. This has particularly important implications
for the German 138 BGB, 826 BGB and ad hoc duties to disclose
insider information.
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