Deliberation and Security Design in Bankruptcy

36 Pages Posted: 29 May 2007

See all articles by Hulya Eraslan

Hulya Eraslan

Rice University

Bilge Yilmaz

University of Pennsylvania - Finance Department

Date Written: March 2007


We consider negotiations among the claimants of a bankrupt firm in which claimants have private information about various operational restructuring alternatives, and can communicate prior to a proposal. Our setup differs from typical bargaining games with incomplete information in two ways. First, the proposals can be made using securities. Second, the negotiations are over two interdependent issues: what to do with the firm and who gets what. In line with Chapter 11 bankruptcy proceedings we first analyze the case in which both issues are negotiated simultaneously. We show that simultaneous negotiation leads to efficient operational restructuring. Moreover, any efficient equilibrium requires that the original senior claimants receive senior securities of the reorganized firm. Next, we analyze the cases in which the two issues are negotiated sequentially. If the first issue is what to do with the firm, then efficient operational restructuring is not possible. In contrast, if the first issue is who gets what, then sequential negotiation is efficient. In comparison to simultaneous negotiation, efficient sequential negotiation may result in junior claimant capturing a larger surplus.

Keywords: Bankruptcy, Chapter 11, Corporate Reorganization, Bargaining with Securities, Multi-issue Bargaining

JEL Classification: G33, C78

Suggested Citation

Eraslan, Hulya and Yilmaz, Bilge, Deliberation and Security Design in Bankruptcy (March 2007). Available at SSRN: or

Hulya Eraslan (Contact Author)

Rice University ( email )

Department of Economics MS-22
Rice University P.O Box 1892
Houston, TX Texas 77251-1892
United States
7133483453 (Phone)


Bilge Yilmaz

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1163 (Phone)
215-898-6200 (Fax)

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