Resolution of Financial Distress Under Chapter 11

Posted: 12 Dec 2010

See all articles by Amira Annabi

Amira Annabi

Manhattan College; Manhattan College

Michèle Breton

HEC Montreal - Department of Management Sciences

Pascal Francois

HEC Montreal - Department of Finance

Date Written: December 10, 2010

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

Annabi, Amira and Breton, Michèle and Francois, Pascal, Resolution of Financial Distress Under Chapter 11 (December 10, 2010). Available at SSRN: https://ssrn.com/abstract=1723359 or http://dx.doi.org/10.2139/ssrn.1723359

Amira Annabi

Manhattan College ( email )

Riverdale, NY 10471
United States

Manhattan College ( email )

Manhattan College Parkway
Riverdale, NY 10471
United States

Michèle Breton

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6490 (Phone)
514-340-5634 (Fax)

Pascal Francois (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

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