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Cost Sharing and Bankruptcy Law Orientation

In: Economic and Legal Issues in Competition, Intellectual Property, Bankruptcy, and the Cost of Raising Children

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  • Nicolae Stef

Abstract

In bankruptcy, a reorganization procedure is based on the terms of a reorganization plan aimed to save a financially distressed firm. We provide an original approach of the reorganization plan that we treated as a future contract that demands to creditors a certain degree of cost sharing. This paper examines how the sharing of the reorganization plan costs influences the bankruptcy outcome of such firm.The sharing of the costs between creditors and debtor is analyzed by a static theoretical model that uses a Lagrangian approach.We show that debtors have strong incentives to propose reorganization plans which provide an expected gain for creditors higher than the liquidation value of the firm and lower than the payment of the reorganization plan with an optimal sharing degree. Hence, a reorganization plan can be rejected by creditors if the sharing degree is too important.The liquidation of the firm can be avoided if the design of the reorganization plan is improved by performing an appraisal or purchasing the services of an audit company.The novelty of this paper resides in the distinction of two types of bankruptcy legal systems. The first one represents a pro-creditor or a creditor-friendly bankruptcy system in which the claimants’ payment is not limited to a fixed value written in the reorganization plan. Conversely, we treated the case of a debtor-friendly bankruptcy system which limits the creditors’ payment. The results of our model hold independently of the bankruptcy law orientation, that is, pro-creditor or pro-debtor.

Suggested Citation

  • Nicolae Stef, 2015. "Cost Sharing and Bankruptcy Law Orientation," Research in Law and Economics, in: James Langenfeld (ed.), Economic and Legal Issues in Competition, Intellectual Property, Bankruptcy, and the Cost of Raising Children, volume 27, pages 181-207, Emerald Publishing Ltd.
  • Handle: RePEc:eme:rlwezz:s0193-589520150000027007
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    Cited by:

    1. Stef, Nicolae & Zenou, Emmanuel, 2021. "Management-to-staff ratio and a firm's exit," Journal of Business Research, Elsevier, vol. 125(C), pages 252-260.
    2. Nicolae Stef, 2021. "Institutions and corporate financial distress in Central and Eastern Europe," European Journal of Law and Economics, Springer, vol. 52(1), pages 57-87, August.
    3. Stef, Nicolae & Dimelis, Sophia, 2020. "Bankruptcy regime and the banking system," Economic Modelling, Elsevier, vol. 87(C), pages 480-495.
    4. Stef, Nicolae, 2018. "Bankruptcy and the difficulty of firing," International Review of Law and Economics, Elsevier, vol. 54(C), pages 85-94.
    5. Stef, Nicolae & Bissieux, Jean-Joachim, 2022. "Resolution of corporate insolvency during COVID-19 pandemic. Evidence from France," International Review of Law and Economics, Elsevier, vol. 70(C).

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