Debtholders and Multiple Constituencies

The Frankfurt team will lead on and oversee this theme, which will involve members of the following nodes:

	Center for Financial Studies (CFS)		London Business School (LBS)
	Stichtung Katholieke Universiteit Brabant		Swiss Federal Institute of Technology, Zürich
	Centro de Estudios Monetarios y Financieros (CEMFI)

Objectives
	to provide conclusive answers to open research questions in this area;
	to use industry links to access unique data;
	to exploit the unique institutional features of Europe to produce unique insights that will be recognised internationally.
Main projects
	Risk shifting and corporate governance. The Frankfurt node will investigate risk shifting and corporate governance in the new markets for asset securitization. The rapid development of securitization markets in traditional bank-dominated financial system, such as Germany, France and Italy, poses challenging questions to observers and policy makers. Three major questions will de dealt with in this project: First, what determines the contractual forms chosen in the securitization of loans and other financial assets? Second, under what conditions will there be liquid markets in these new instruments, and what are possible institutional and legal obstacles? Third, to what extent does the expansion of securitization lead to changes in the allocation of risk in the economy? All three questions will entail the combination of empirical and theoretical work. Results are expected to contribute to an understanding of the ongoing change in corporate governance in Europe, relating to the strengthening of market processes in an otherwise bank-dominated financial landscape. The project will also involve the participation of industry representatives from investment banks active in arranging CDO issues, and from rating agencies.
	Corporate law and bankruptcy codes. The LBS team will study the influence of corporate law and bankruptcy codes using a sample of small to medium size distressed companies from three countries, France, Germany and the U.K. The results of the study will be used to examine how differences in the legal environment affect the outcomes of distress, for example the incidence of default and bankruptcy and recovery rates for creditors. The project will also focus on the issue of how these differences in outcomes affect the firm’s pre-distress capital structure, provisions and design of debt contracts, and interest rate margins. Using a time series of company defaults from banks in the three countries, it will examine how outcomes of distress vary across different stages of the business cycle within a country and across countries. Large differences in bankruptcy codes may result in very different bankruptcy outcomes and costs of distress.

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