Using Options to Divide Value in Corporate Bankruptcy
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
European Economic Review, Vol. 44, pp. 829-843, 2000
Harvard Law and Economics Discussion Paper No. 271, 1999
This paper revisits the proposal to use options in corporate bankruptcy that was put forward in Bebchuk (1988). According to the proposed procedure, corporate bankruptcy should be implemented through the distribution to participants of appropriately designed options. The paper starts by discussing the goals that should guide the design of bankruptcy procedures. The paper then explains how the options procedure can improve both ex post efficiency and ex ante efficiency. The paper offers a refined version of the procedure, and it also responds to questions that have been raised regarding the execution and desirability of the procedure. The paper concludes by explaining the relationship between the options approach to corporate bankruptcy and the Black-Scholes characterization of all corporate securities as options.
Number of Pages in PDF File: 24
Keywords: Bankruptcy, reorganization, options
JEL Classification: G3, G33, K2
Date posted: March 27, 2000 ; Last revised: May 10, 2009
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