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Game Theoretic Analysis of Negotiations under Bankruptcy

  • Amira Annabi
  • Michèle Breton
  • Pascal François
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    We extend the contingent claims framework for the levered firm in explicitly modeling the resolution of financial distress under formal bankruptcy as a non-cooperative game between claimants under the supervision of the bankruptcy judge. The identity of the class of claimants proposing the first reorganization plan is found to be a key determinant of the likelihood of liquidation and of the renegotiated value of claims. Our quantitative results confirm the economic intuition that a bankruptcy design must trade-off the initial priority of claims with the viability of reorganized firms.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2011/CIRPEE11-13.pdf
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    Paper provided by CIRPEE in its series Cahiers de recherche with number 1113.

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    Date of creation: 2011
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    Handle: RePEc:lvl:lacicr:1113
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    1. Mella-Barral, Pierre, 1999. "The Dynamics of Default and Debt Reorganization," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 535-78.
    2. Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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