 Could Chapter 11 redeem itself? Wealth and welfare effects of the redemption optionAmira Annabi, Michèle Breton and Pascal François International Review of Law and Economics, 2021, vol. 67, issue C Abstract: A redemption option granted to junior creditors has been advocated to accelerate Chapter 11 negotiations and rebalance junior recovery with respect to senior claims. We develop a game-theoretic, continuous-time model of the leveraged firm under Chapter 11 to assess the wealth transfers and welfare impacts of such an amendment to the bankruptcy procedure. After fitting the model to Chapter 11 current outcomes, we show that the redemption option design overcompensates junior creditors, leading to different, but not less frequent, Absolute Priority Rule violations. Since the reform shifts negotiations from a three- to a two-player game, it reduces the scope for concessions in the bargaining process and raises the risk of liquidation. Importantly, the redemption option aligns junior creditors’ interests with those of shareholders, thereby increasing the incentives for risk-shifting prior to bankruptcy. Keywords: Chapter 11; Bankruptcy; APR violation; Recovery; Game theory; Dynamic programming (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:67:y:2021:i:c:s0144818821000296 DOI: 10.1016/j.irle.2021.106005 Access Statistics for this article International Review of Law and Economics is currently edited by C. Ott, A. W. Katz and H-B. Schäfer More articles in International Review of Law and Economics from Elsevier |
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