Resolution of Financial Distress Under Chapter 11

Posted: 12 Dec 2010 Last revised: 8 Nov 2019

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, 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

Annabi, Amira and Breton, Michèle and Francois, Pascal, Resolution of Financial Distress Under Chapter 11 (December 10, 2012). Journal of Economic Dynamics and Control, Vol. 36, No. 12, 2012, Available at SSRN: https://ssrn.com/abstract=1723359 or http://dx.doi.org/10.2139/ssrn.1723359

Amira Annabi

Manhattan College ( email )

The O'Malley School of Business
Economics and Finance Department
Riverdale, NY 10471
United States

HOME PAGE: http://https://www.linkedin.com/in/amiraannabi/

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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