Corporate Bankruptcy Reorganizations: Estimates from a Bargaining Model
Rodney L. White Center for Financial Research Working Paper No. 18-02
44 Pages Posted: 19 Jun 2003
Date Written: November 27, 2002
When a firm files for Chapter 11 bankruptcy in the U.S., negotiations take place among its claimants to decide on what to do with the firm and who gets what. If an agreement cannot be reached, then the firm is likely be liquidated. Consequently, the liquidation value of the firm plays a crucial role in the deal that is struck among the claimants. In this paper, we use a novel approach to measure the liquidation value through the information contained in the agreed upon allocations in Chapter 11 negotiations. We do so by estimating a game theoretic model that captures the influence of liquidation value on the equilibrium allocations using a new hand collected data set. We find that the liquidation values are higher when the industry conditions are more favorable, and the real interest rates are higher. We use our estimated model to conduct a counterfactual experiment to quantitatively assess the impact of a mandatory liquidation on the equilibrium allocations.
Keywords: Corporate bankruptcy, Chapter 11, Multilateral bargaining, Structural estimation
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