Resolution of Financial Distress Under Chapter 11

Posted: 19 Sep 2012

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: January 1, 2012

Abstract

We develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the U.S. bankruptcy procedure (known as Chapter 11). 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 the liquidation rate, the duration of Chapter 11 and the frequency of deviations from the Absolute Priority Rule, which 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 Annabi, Amira and Breton, Michèle and Francois, Pascal, Resolution of Financial Distress Under Chapter 11 (January 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012, Available at SSRN: https://ssrn.com/abstract=2079695 or http://dx.doi.org/10.2139/ssrn.2079695

Amira Annabi

Manhattan College ( email )

Manhattan College Parkway
Riverdale, NY 10471
United States

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/

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)