Debating the Question of Undervaluation in Chapter 11
4 Pages Posted: 24 Mar 2017
Date Written: December 1, 2016
One of the most complex and contentious aspects of the Chapter 11 bankruptcy process is making accurate valuation of the company in order to determine the final recovery for various claimholders. Valuation hearings are often lengthy affairs involving expert testimony from various constituents. Despite this robust process, some observers believe that firms in bankruptcy are generally undervalued because their normal value has been driven down by negative circumstances. This paper examines the reasons why a firm's valuation must be explored in a relative, not absolute, context. It describes how, when the valuations of bankrupt companies are viewed from the perspective of prevalent market conditions at the time of plan confirmation, the historical record suggests that companies filing for Chapter 11 actually are overvalued more often than not.
Keywords: bankruptcy, restructuring, valuation
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