Using Options to Divide Value in Corporate Bankruptcy

24 Pages Posted: 27 Mar 2000 Last revised: 10 May 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

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Abstract

This paper revisits the proposal to use options in corporate bankruptcy that was put forward in Bebchuk (1988). According to the proposed procedure, corporate bankruptcy should be implemented through the distribution to participants of appropriately designed options. The paper starts by discussing the goals that should guide the design of bankruptcy procedures. The paper then explains how the options procedure can improve both ex post efficiency and ex ante efficiency. The paper offers a refined version of the procedure, and it also responds to questions that have been raised regarding the execution and desirability of the procedure. The paper concludes by explaining the relationship between the options approach to corporate bankruptcy and the Black-Scholes characterization of all corporate securities as options.

Keywords: Bankruptcy, reorganization, options

JEL Classification: G3, G33, K2

Suggested Citation

Bebchuk, Lucian A., Using Options to Divide Value in Corporate Bankruptcy. European Economic Review, Vol. 44, pp. 829-843, 2000, Harvard Law and Economics Discussion Paper No. 271, 1999, Available at SSRN: https://ssrn.com/abstract=214130 or http://dx.doi.org/10.2139/ssrn.214130

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

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National Bureau of Economic Research (NBER) ( email )

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