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Solomon's Knot by Robert D. Cooter, Hans-Bernd Schäfer

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Chapter 10

Hold or Fold—Financial Distress

In Silicon Valley start-ups, the World Cup, and the elk rut, some win and many lose. Success and failure are two sides of risk taking in sports, business, and biology. The previous chapters concerned how law unites capital and ideas to create winning firms. This chapter concerns how law resolves financial distress in failing firms. Firms owe money to commercial banks that make loans, investment banks that buy bonds or preferred shares, suppliers who deliver goods on credit, consumers who pay for goods before their delivery, employees with unpaid wages, accident victims awarded compensation, among others. When a firm loses money for long enough, it cannot service its debts. If losses are temporary, the ...

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