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Game Theoretic Analysis of Negotiations under Bankruptcy

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  • Amira Annabi
  • Michèle Breton
  • Pascal François
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    Abstract

    We extend the contingent claims framework for the levered firm in explicitly modeling the resolution of financial distress under formal bankruptcy as a non-cooperative game between claimants under the supervision of the bankruptcy judge. The identity of the class of claimants proposing the first reorganization plan is found to be a key determinant of the likelihood of liquidation and of the renegotiated value of claims. Our quantitative results confirm the economic intuition that a bankruptcy design must trade-off the initial priority of claims with the viability of reorganized firms.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2011/CIRPEE11-13.pdf
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    Bibliographic Info

    Paper provided by CIRPEE in its series Cahiers de recherche with number 1113.

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    Date of creation: 2011
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    Handle: RePEc:lvl:lacicr:1113

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    Keywords: Bankruptcy procedure; game theory; dynamic programming;

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    1. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-56, June.
    2. Mella-Barral, Pierre, 1999. "The Dynamics of Default and Debt Reorganization," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 535-78.
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