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Using Options to Divide Value in Corporate Bankruptcy

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Author Info
Lucian Arye Bebchuk

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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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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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Handle: RePEc:nbr:nberwo:7614

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Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hotchkiss, Edith Shwalb, 1995. " Postbankruptcy Performance and Management Turnover," Journal of Finance, American Finance Association, vol. 50(1), pages 3-21, March. [Downloadable!] (restricted)
  2. Aghion, Philippe & Hart, Oliver & Moore, John, 1992. "The Economics of Bankruptcy Reform," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 523-46, October.
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  3. Hart, Oliver & La Porta Drago, Rafael & Lopez-de-Silanes, Florencio & Moore, John, 1997. "A new bankruptcy procedure that uses multiple auctions," European Economic Review, Elsevier, vol. 41(3-5), pages 461-473, April. [Downloadable!] (restricted)
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  4. 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, vol. 45(5), pages 1457-69, December. [Downloadable!] (restricted)
  5. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October. [Downloadable!] (restricted)
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  7. David M. Cutler & Lawrence H. Summers, 1988. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 157-172, Summer. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Régis Blazy & Laurent Weill, 2007. "The Impact of Legal Sanctions on Moral Hazard when Debt Contracts are Renegotiable," Working Papers DULBEA 07-06.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
    Other versions:
  2. Michelle J. White, 2005. "Economic Analysis of Corporate and Personal Bankruptcy Law," NBER Working Papers 11536, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Bebchuk, Lucian Arye, 2001. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," CEPR Discussion Papers 2914, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Seung-Hyun Lee & Yasuhiro Yamakawa & Mike W. Peng, 2008. "Entrepreneurship and the Barrier to Exit: How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?," The Office of Advocacy Small Business Working Papers 08slyymp, U.S. Small Business Administration, Office of Advocacy. [Downloadable!]
  5. Régis Blazy & Gisèle Umbhauer & Laurent Weill, 2008. "How Bankruptcy Punishment Influences the Ex-Ante Design of Debt Contracts?," Working Papers of CREFI-LSF (Centre of Research in Finance - Luxembourg School of Finance) 08-04, CREFI-LSF, University of Luxembourg. [Downloadable!]
  6. Franken, S., 2003. "The debtor-oriented model versus the creditor-oriented model of corporate bankruptcy law : a US-Dutch comparison," Discussion Paper 14, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
  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, vol. 21(1), pages 79-94, January. [Downloadable!] (restricted)
  8. 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, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
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