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Using Options to Divide Value in Corporate Bankruptcy

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  • Lucian Arye Bebchuk

Abstract

This paper revisits the proposal to use options in corporate bankruptcy that was put forward in Bebchuk (1988). According to the proposed procedure, corporate bankruptcy should be implemented through the distribution to participants of appropriately designed options. The paper starts by discussing the goals that should guide the design of bankruptcy procedures. The paper then explains how the options procedure can improve both ex post efficiency and ex ante efficiency. The paper offers a refined version of the procedure, and it also responds to questions that have been raised regarding the execution and desirability of the procedure. The paper concludes by explaining the relationship between the options approach to corporate bankruptcy and the Black-Scholes characterization of all corporate securities as options.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7614.

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Date of creation: Mar 2000
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Publication status: published as "Using Options to Divide Value in Corporate Bankruptcy" European Economic Review, Vol. 44, pp. 829-843 (2000).
Handle: RePEc:nbr:nberwo:7614

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
  3. 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.
  4. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters, National Bureau of Economic Research, Inc, in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
  5. 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.
  6. David M. Cutler & Lawrence H. Summers, 1987. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," NBER Working Papers 2418, National Bureau of Economic Research, Inc.
  7. Bebchuk, Lucian Ayre & Chang, Howard F, 1992. "Bargaining and the Division of Value in Corporate Reorganization," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 8(2), pages 253-79, April.
  8. Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 4(2), pages 13-34.
  9. Hotchkiss, Edith Shwalb, 1995. " Postbankruptcy Performance and Management Turnover," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 3-21, March.
  10. 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.
  11. Oliver Hart & Rafael La Porta Drago & Florencio Lopez-de-Silane & John Moore, 1997. "A New Bankruptcy Procedure that Uses Multiple Auctions," NBER Working Papers 6278, National Bureau of Economic Research, Inc.
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Cited by:
  1. Hausch, Donald B. & Ramachandran, S., 2009. "Systemic financial distress and auction-based bankruptcy reorganization," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(3), pages 366-380, June.
  2. Becht, Marco & Bolton, Patrick & Roell, Ailsa, 2003. "Corporate governance and control," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 1, pages 1-109 Elsevier.
  3. Régis Blazy & Laurent Weill, 2007. "The impact of legal sanctions on moral hazard when debt contracts are renegotiable?," DULBEA Working Papers, ULB -- Universite Libre de Bruxelles 07-06.RS, ULB -- Universite Libre de Bruxelles.
  4. Lucian Arye Bebchuk, 2002. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 445-460, 02.
  5. Régis Blazy & Gisèle Umbhauer & Laurent Weill, 2008. "How Bankruptcy Punishment Influences the Ex-Ante Design of Debt Contracts?," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 08-04, Luxembourg School of Finance, University of Luxembourg.
  6. Lee, Seung-Hyun & Yamakawa, Yasuhiro & Peng, Mike W. & Barney, Jay B., 2011. "How do bankruptcy laws affect entrepreneurship development around the world?," Journal of Business Venturing, Elsevier, vol. 26(5), pages 505-520, September.
  7. Alexander Dilger, 2006. "Forced to make mistakes: Reasons for complaining about Bebchuk's scheme and other market-oriented insolvency procedures," European Journal of Law and Economics, Springer, Springer, vol. 21(1), pages 79-94, January.
  8. Li, Yuanzhi & Zhong, Zhaodong (Ken), 2013. "Investing in Chapter 11 stocks: Trading, value, and performance," Journal of Financial Markets, Elsevier, Elsevier, vol. 16(1), pages 33-60.
  9. Blazy, Régis & Deffains, Bruno & Umbhauer, Gisèle & Weill, Laurent, 2013. "Severe or gentle bankruptcy law: Which impact on investing and financing decisions?," Economic Modelling, Elsevier, Elsevier, vol. 34(C), pages 129-144.
  10. Régis Blazy & Laurent Weill, 2006. "The Impact of Legal Sanctions on Moral Hazard when Debt Contracts are Renegotiable," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 06-09, Luxembourg School of Finance, University of Luxembourg.
  11. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc.
  12. Dilger, Alexander, 2000. "The market is fairer than Bebchuk's scheme," Wirtschaftswissenschaftliche Diskussionspapiere, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics 09/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  13. Alexander Radygin & Revold Entov & Irina Mezheraups & Alina Gontmakher & Yuri Simachev & Natalia Shmeleva & Mikhail Kuzyk & Harry Swain, 2005. "The Institution of Bankruptcy: Development, Problems, Areas of Reforming," Published Papers, Gaidar Institute for Economic Policy 123, Gaidar Institute for Economic Policy, revised 2012.
  14. James Routledge & David Morrison, 2012. "Insolvency administration as a strategic response to financial distress," Australian Journal of Management, Australian School of Business, Australian School of Business, vol. 37(3), pages 441-459, December.
  15. Araújo, Aloísio Pessoa de & Funchal, Bruno, 2005. "Past and Future of the Bankruptcy Law in Brazil and Latin America," Economics Working Papers (Ensaios Economicos da EPGE) 599, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  16. Kalay, Avner & Singhal, Rajeev & Tashjian, Elizabeth, 2007. "Is Chapter 11 costly?," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(3), pages 772-796, June.
  17. Li, Yuanzhi, 2013. "A nonlinear wealth transfer from shareholders to creditors around Chapter 11 filing," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(1), pages 183-198.

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