Restructuring Capacity and Collateral

Abstract

Do firms lose in value if the creditor gets control? Some recent contributions to the security design literature claim that transfer of control is costless. There are, on the other hand, various renegotiation models which explicitly assume that the creditorYs management is less efficient and thus the value of the firm decreases as soon as the bank takes over. We follow that assumption in the renegotiation literature but believe that the creditor can remove this bottleneck by costly acquiring restructuring capacity. In this paper we will analyze whether banks have an incentive to take such an ex ante investment. Moreover, we investigate whether the costly acquisition of restructuring capacity can be substituted by taking a collateral. Using a game theoretic framework, which has been first introduced by Helmut Bester [1994], we find that the creditor has a strong incentive to invest in restructuring capacity if he can appropriate the whole project's surplus or has to finance a costly project. It turns out that taking a collateral substitutes restructuring capapicity. The substitution, however, is not necessarily wealth decreasing as has been sometimes maintained in the literature but, on the contrary, strictly wealth increasing.

JEL Classification: G33, G21