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Resolution of financial distress under Chapter 11

  • Annabi, Amira
  • Breton, Michèle
  • François, Pascal
Registered author(s):

    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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    File URL: http://www.sciencedirect.com/science/article/pii/S016518891200139X
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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