On the Role of Monitoring near Financial Distress: an economic and legal analysis

When things turn out wrong for a company, the people involved usually have some idea why. With hindsight scholars, judges, journalists, trade union representatives, shareholders or bankers may conclude that an acquisition was too big, an investment too risky, reorganization too late, or that the management was not capable of doing its job. Bad faith might play a role. Administrators1 often detect fraud or serious negligence. In large bankruptcies like Enron, WorldCom, Parmalat or Lehman Brothers, billions of US dollars were at stake. Such cases are rare. Mostly the amounts are much smaller, but there are definitely many of such small bankruptcies. Severe losses may be suffered by trade creditors, banks, bondholders, the tax authorities and social securities agencies. More important than the amount of money involved might be the damage inflicted on human beings as a consequence of bankruptcy (Argenti, 1976). Due to unemployment, pension loss or commercial losses, the future prospects of employees, pensioners, small service providers and product suppliers may be seriously damaged. Thus, human beings as well as society will win by decreasing the incidence of bankruptcy. This thesis focuses on companies near financial distress. ‘Companies’ means privatesector legal persons, with either a profit or a nonprofit object2. ‘Financial distress’ is the subject of chapter 2. Its most widely-known form is bankruptcy. Specifically, this study analyses economic and legal mechanisms in situations of near financial distress. These prove to be of a rather ex post nature. In chapter 5 the study develops an approach with an ex ante character.

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