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 Law and Economics Institute.