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Bargaining and the Division of Value in Corporate Reorganization

  • Bebchuk, Lucian Ayre
  • Chang, Howard F

This paper develops a sequential bargaining model of the negotiations in corporate reorganizations under Chapter 11. We identify the expected outcome of the bargaining process and examine the effects of the legal rules that shape the bargaining. We determine how much value equity holders and debt holders receive under the Chapter 11 process, and compare the value obtained by each class with the 'contractual right' of that class. We identify and analyze three reasons that the equity holders can expect to obtain some value even when the debt holders are not paid in full. Finally, we show how the features of the reorganization process and of the company filing under Chapter 11 affect the division of value, and in this way we provide several testable predictions.

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Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 8 (1992)
Issue (Month): 2 (April)
Pages: 253-79

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Handle: RePEc:oup:jleorg:v:8:y:1992:i:2:p:253-79
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  1. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
  2. Charles P. Normandin, 1989. "The changing nature of debt and equity; a legal perspective," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 33, pages 49-79.
  3. 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.
  4. Oliver Hart & John Moore, 1990. "A Theory of Corporate Financial Structure Based on the Seniority of Claims," NBER Working Papers 3431, National Bureau of Economic Research, Inc.
  5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  7. Gul, Faruk & Sonnenschein, Hugo, 1988. "On Delay in Bargaining with One-Sided Uncertainty," Econometrica, Econometric Society, vol. 56(3), pages 601-11, May.
  8. Sanford J. Grossman & Motty Perry, 1986. "Sequential Bargaining Under Asymmetric Information," NBER Technical Working Papers 0056, National Bureau of Economic Research, Inc.
  9. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-51, Spring.
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