Game-Theoretic Bankruptcy Valuation
Barry E. Adler
New York University School of Law
December 28, 2006
New York University, Law & Economics Research Paper Series
The rules of bankruptcy reorganization in the United States permit a judge to permit a debtor's retention of collateral for a loan even over the objection of the secured creditor; the results may include continuation of inviable firms, violations of absolute priority, and high transactions cost. An alternative would grant a secured creditor the unfettered right to retain its collateral; the results might include liquidation of viable firms, violations of absolute priority, and high transactions cost. Proposed here is a mechanism that mediates between these imperfect options: junior interests would control the bankruptcy process and would, on behalf of the debtor, propose a reorganization plan that could include a take-it-or-leave-it offer for collateral, with certain liquidation of the collateral the consequence if the secured creditor rejects the plan. This process would preserve any significant debtor going-concern surplus and largely honor absolute priority. The mechanism would, therefore, promote ex post as well as ex ante efficiency. Moreover, because a take-it-or-leave-it offer process neither requires negotiation nor permits litigation, the parties would be spared the risk of bargaining expense or breakdown and would be saved the cost of persuasion or proof with respect to values the parties know or can reasonably estimate.
Number of Pages in PDF File: 50
Keywords: Bankruptcy, Corporate Finance, Secured Claim, Valuation, Uncertainty, Information Asymmetry
JEL Classification: D81, D82, G30, G32, G33, K10, K22
Date posted: January 1, 2007
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