Conference on Creditors and Corporate Governance
Even though it has been understood since the work of Modigliani and Miller in the 1950s that the cashflow rights of holders of debt and equity were not different in kind, the traditional understanding of corporate governance sees control rights radically differently. It draws a sharp line between debt and equity. Shareholders, as the residual owners, hold the reins of power. They elect the board of directors and the board is responsible to them. By contrast, creditors deal with the board at arm’s length and their rights take the form of a trip-wire, a right to call their loans in the event of default. Recent work has called this conventional wisdom into question. Creditors typically insist on elaborate covenants that give them control over the firm, especially when the firm encounters hard times. These give them the power not merely to call their loans, but also to exercise control over the firm itself. In many states of the world, indeed in those in which investors are most likely to exercise control, creditors may wield even greater power over the firm than the shareholders.
These dynamics of creditor control and the empirical study of them mark a recent trend in scholarship in both law and finance. See, e.g., Baird & Rasmussen, Private Debt and the Missing Lever of Corporate Governance, 154 U. Pa. L. Rev. 1209 (2006); Tung, Leverage in the Board Room: The Unsung Influence of Private Lenders in Corporate Governance, 57 UCLA L. Rev. 115 (2009); Roberts & Sufi, Control Rights and Capital Structure: An Empirical Investigation, 64 J. Fin. 1657 (2009); Nini, Smith & Sufi, Creditor Control Rights and Firm Investment Policy, 92 J. Fin. Econ. 400 (2009). At the same time, the power that creditors derive from these control rights now has powerfully reshaped the dynamics of corporate reorganizations. See, e.g., Ayotte & Morrison, Creditor Control and Conflict in Chapter 11, 2 J. Legal Analysis 511 (2009); Casey, The Creditors’ Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. L. Rev. – (2011).
This work provides a counterbalance to much of the work in corporate finance over the last three decades that has been focused almost exclusively on the relationship between boards and shareholders.
This conference will serve a twofold purpose. First, it will connect the academics in finance, economics, and law who have focused on this issue, and it will also provide a chance to introduce these issues to those academics interested in corporate finance to this new area of research.
The conference is being organized by Douglas Baird and Anthony Casey, both University of Chicago Law School, and Amir Sufi, Booth School of Business. It is sponsored by the Becker-Friedman Institute and the Institute for Law and Economics.
Friday, September 14
9:15–9:30 Opening Remarks
Bankruptcy Law as a Liquidity Provider
Kenneth M. Ayotte Northwestern University School of Law, and David A. Skeel, University of Pennsylvania Law School
Dynamic Risk Management
Amir Sufi, University of Chicago Booth School of Business, and Adriano A. Rampini and S. Viswanathan, both Fuqua School of Business, Duke University
Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis
Fred Tung, Boston University School of Law, and Xue Wang, Fisher College of Busines, Ohio State University
Real Effects of Hedge Fund Activism: Productivity, Risk and Product Market Competition
Wei Jiang, Columbia University Graduate School of Business, and Alon Brav, Fuqua School of Business, Duke University, and Hyunseob Kim, Johnson Graduate School of Management, Cornell University
Private Equity and the Resolution of Financial Distress
Per Strömberg, Stockholm School of Economics, Edie Hotchkiss, Carroll School of Management, Boston College, and David C. Smith, McIntire School of Commerce, University of Virginia
The Ownership and Trading of Debt Claims in Chapter 11 and Restructurings
David C. Smith, McIntire School of Commerce, University of Virginia, and Ben Iverson and Victoria Ivashina, both Harvard Business School
Reposession and the Democratization of Credit
Efraim Benmelech, Northwestern University Kellogg School of Management, and Juliano J. Assunção and Fernando S. S. Silva, both Catholic University of Rio de Janeiro (PUC-Rio)
Saturday, September 15
The Impact of Creditor Control on Corporate Bond Pricing and Liquidity (tentative)
Edith Hotchkiss, Carroll School of Management, Boston College, Peter Feldhutter, London Business School, and Oguzhan Karakas, Boston College
No Exit? Withdrawal Rights and the Law of Corporate Reorganization
Douglas G. Baird and Anthony J. Casey, both University of Chicago Law School