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Title: Resolution of Financial Distress under Chapter 11
Authors: Annabi, Amira
Breton, Michèle
François, Pascal
Keywords: Credit risk
Chapter 11
Game Theory
Dynamic programming
Issue Date: 2010-12
Series/Report no.: Cahiers du CIRPÉE;10-48
Abstract: We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy judge can intervene in any renegotiation round to impose a plan. The multiple-stage bargaining process is solved in a non-cooperative game theory setting. The calibrated model yields liquidation rate, Chapter 11 duration and percentage of deviations from the Absolute Priority Rule that are consistent with empirical evidence.
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