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Resolution of financial distress under Chapter 11

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  • Annabi, Amira
  • Breton, Michèle
  • François, Pascal
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    Abstract

    We develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the U.S. bankruptcy procedure (known as Chapter 11). Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy judge can intervene in any renegotiation round to impose a plan. The multiple-stage bargaining process is solved in a non-cooperative game-theory setting. The calibrated model yields the liquidation rate, the duration of Chapter 11 and the frequency of deviations from the Absolute Priority Rule, which are consistent with empirical evidence.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 36 (2012)
    Issue (Month): 12 ()
    Pages: 1867-1887

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    Handle: RePEc:eee:dyncon:v:36:y:2012:i:12:p:1867-1887

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Credit risk; Chapter 11; Game theory; Dynamic programming;

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    References

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    Cited by:
    1. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Game theoretic analysis of negotiations under bankruptcy," European Journal of Operational Research, Elsevier, vol. 221(3), pages 603-613.
    2. Pascal François & Alon Raviv, 2014. "Heterogeneous Beliefs and the Choice Between Private Restructuring and Formal Bankruptcy," Cahiers de recherche 1401, CIRPEE.

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