Resolution of Financial Distress under Chapter 11 Amira Annabi , Michèle Breton and Pascal François

This paper examines the reorganization process under Chapter 11 of the U.S. bankruptcy code. Our model considers two classes of creditors and accommodates several features of Chapter 11, including the intervention of the bankruptcy judge. We model the strategic interaction between claimants under Chapter 11 as a costly multiple-stage bargaining process, and solve it in a game theory setting. Using a structural framework, we extend the existing literature by generating reorganization and liquidation outcomes. We …nd that these outcomes are a¤ected by the characteristics of the …rm and of the negotiation game: the likelihood of liquidation increases with the probability of the bankruptcy judge intervention, asset volatility, length of negotiation process, and …nancial distress costs. JEL classi…cation: C61, C7, G33, G34.