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The Economics of Bankruptcy Reform

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Author Info

  • Aghion, P.
  • Hart, O.
  • Moore, J.

Abstract

We propose a new bankruptcy procedure. Initially, a firm's debts are cancelled, and cash and non-cash bids are solicited for the "new" (all equity) firm. Former claimants are given shares, or options to buy shares, in the new firm on the basis of absolute priority. Options are exercised once the bids are in. Finally, a shareholder vote is taken to select one of the bids. In essence, our procedure is a variant on the U.S. Chapter 7, in which non-cash bids are possible; this allows for reorganization. We believe our scheme is superior to Chapter 11 since it is simpler, quicker, market-based, avoids conflicts, and places appropriate discipline on management.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 92-11.

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Length: 47 pages
Date of creation: 1992
Date of revision:
Handle: RePEc:mit:worpap:92-11

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: (617) 253-3361
Fax: (617) 253-1330
Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Related research

Keywords: bankruptcy ; enterprises ; economic models;

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References

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  1. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, American Finance Association, vol. 39(4), pages 1067-89, September.
  2. Ritter, Jay R., 1987. "The costs of going public," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(2), pages 269-281, December.
  3. Andrei Shleifer & Robert W. Vishny, 1991. "Asset Sales and Debt Capacity," NBER Working Papers 3618, National Bureau of Economic Research, Inc.
  4. White, Michelle J, 1983. " Bankruptcy Costs and the New Bankruptcy Code," Journal of Finance, American Finance Association, American Finance Association, vol. 38(2), pages 477-88, May.
  5. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  6. Franks, Julian R & Torous, Walter N, 1989. " An Empirical Investigation of U.S. Firms in Reorganization," Journal of Finance, American Finance Association, American Finance Association, vol. 44(3), pages 747-69, July.
  7. Hart, O. & Moore, J., 1991. "A Theory of Debt Based on the Inalienability of Human Capital," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 592, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Stuart C. Gilson, 1991. "Managing Default: Some Evidence On How Firms Choose Between Workouts And Chapter 11," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 4(2), pages 62-70.
  9. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1223-42, September.
  10. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 315-353, October.
  11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  12. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  13. Eberhart, Allan C & Moore, William T & Roenfeldt, Rodney L, 1990. " Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1457-69, December.
  14. John J. McConnell & Henri Servaes, 1991. "The Economics Of Prepackaged Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 4(2), pages 93-98.
  15. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 285-314, October.
  16. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 5-50, April.
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