Resolution of Financial Distress Under Chapter 11
Posted: 12 Dec 2010 Last revised: 8 Nov 2019
Date Written: December 10, 2012
Abstract
We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. 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 liquidation rate, Chapter 11 duration and percentage of deviations from the Absolute Priority Rule that are consistent with empirical evidence.
Keywords: Credit risk, Chapter 11, game theory, dynamic programming
JEL Classification: C61, C7, G33, G34
Suggested Citation: Suggested Citation
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