Optimal Financial Contracts for Large Investors: The Role of Lender Liability | Zendy

Mitchell Berlin | Zendy; Loretta J. Mester | Zendy

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Optimal Financial Contracts for Large Investors: The Role of Lender Liability

Author(s) -

Mitchell Berlin,

Loretta J. Mester

Publication year - 2000

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.213815

Subject(s) - liability , business , lender of last resort , financial system , finance , economics , monetary economics , central bank , monetary policy

Our paper explores the optimal financial contract for a large investor with potential control over afirm's investment decisions. We show that an optimally designed menu of claims for a large investor willinclude features resembling a U.S. version of lender liability doctrine, equitable subordination. Thisdoctrine permits a firm's claimants to seek to subordinate a controlling investor's financial claim inbankruptcy court, but only under well-specified conditions. Specifically, we show that ...

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