Transactions with creditors
4 important questions on Transactions with creditors
How does vicinity of insolvency relate to the creditor-shareholder agent problem?
--> Lawmakers make legal restrictions to encourage managers to protect the creditors more than the shareholders (such as debt restructuring and bankruptcy procedures)
Explain why corporate groups can give rise to shareholder-agency problems. TQ
Shareholder-creditor problem: higher agency costs
Subsidiary corporations are by definition subject to a controlling shareholder
Groups present opportunities for
- transfers of assets
- the creation of intra-group liabilities that have the potential to undermine the position of creditors.
- Shifting assets/distribution of taxes can be profitable for production, but comes with more risk for the debt holders
Why do so-called non-adjusting creditors need greater creditor protection than other creditors?TQ
p 115-116
Non-adjusting creditors are owed money by a corporation but are unable to adjust their exposure to reflect the risk they bear.
Example: victims of corporate torts (wrongful acts against businesses that cause financial loss).
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What are two examples of the protection given to non-adjusting creditors? TQ
p 115-116
Two examples of such protection are:
1. Giving non-adjusting creditors priority over other creditors in insolvency proceedings
2. Holding shareholders liable for excess liability
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