Bankruptcy and Reorganization

Agency Costs and Deviations from the Absolute Priority Rule in Bankruptcy Reorganization

A theoretical model examines real investment decisions during bankruptcy reorganization and the closing distribution of property rights over capital structure to creditors and equityholders. Estate value is uncertain. Risky real investment levels in firm technology are endogenous and subject to financing constraints with interest rates sensitive to the probability of default and expected credit...

Maximizing the value of distressed assets: Bankruptcy law and the efficient reorganization of firms

We argue that the main role of corporate bankruptcy is to mitigate bargaining frictions in financial distress. Bankruptcy law can improve ex post bargaining efficiency by (1) verifying assets and liabilities; (2) improving coordination among claimholders; (3) protecting third-party claimants; (4) maintaining asset value during bargaining; and (5) alleviating the impact of liquidity constraints ...

Bankruptcy Reorganization through Markets: Auction-based Creditor Ordering by Reducing Debts (ACCORD)

Financial reorganization under bankruptcy reduces a firm’s debts to a serviceable level through negotiations overseen by courts. Academics have suggested using markets as an alternative to such negotiations, recognizing that equity holders and junior claimants have call options to buy the firm back from senior creditors. This paper further develops this market-based approach when claimants are ...

What Discount Rate should Bankruptcy Judges Use ? Estimates from Canadian Reorganization Data

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in the unsecured creditors' reorganization decision. Using (HARA) utility functions, we find the implicit monthly discount rate of creditors to be 4.9%, which corresponds to an annual discount rate of 77%. This is 7 to 10 times higher than discount rates used in previous empi...

Bankruptcy Judges and Bankruptcy Venue: Some Thoughts on Delaware