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Optimal debt and equity values in the presence of chapter 7 and chapter 11

Broadie, Mark, Chernov, Mikhail and Sundaresan, Suresh (2007) Optimal debt and equity values in the presence of chapter 7 and chapter 11. The Journal of Finance, 62 (3). pp. 1341-1377. ISSN 0022-1082

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Abstract

Explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders. In the first–best outcome, reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improved overall firm value. If control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers, most of the benefits are appropriated by borrowers ex post. Lenders can restore the first–best outcome by seizing this control or by the ex post transfer of control rights. Reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only.

Item Type: Article
Official URL: http://www.afajof.org/
Additional Information: © 2007 The American Finance Association
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C10 - General
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Sets: Departments > Finance
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 10 Nov 2011 10:19
URL: http://eprints.lse.ac.uk/39395/

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