Resolution of financial distress under Chapter 11

Amira Annabi, Michèle Breton and Pascal François

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 12, 1867-1887

Abstract: 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.

Keywords: Credit risk; Chapter 11; Game theory; Dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 C7 G33 G34 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:12:p:1867-1887

DOI: 10.1016/j.jedc.2012.06.004

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