Game Theoretic Analysis of Negotiations under Bankruptcy
HEC Montreal - Department of Management Sciences
HEC Montreal - Department of Finance
May 31, 2011
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 time spent under bankruptcy, the likelihood of liquidation and 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.
Keywords: bankruptcy procedure, game theory, dynamic programming
JEL Classification: C61, C7, G33, G34
Date posted: May 31, 2011
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