Resolution of Financial Distress Under Chapter 11

Breton, Michèle; François, Pascal; Annabi, Amira

doi:10.2139/ssrn.2079695

Cited by 8 publications

(13 citation statements)

References 28 publications

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“…The Stackelberg/Nash equilibrium solution at a given negotiation round is obtained as in Annabi et al (2010), where  identifies the leader at this round. Thus, when the leader proposes his reorganization plan, he takes into account the equilibrium reactions of the two followers, where neither player has a unilateral incentive to change his strategy.…”

Section: Continuation Valuesmentioning

confidence: 99%

“…We consider a firm whose assets grow at expected rate  = 15% with a standard deviation of  = 35%. These asset parameters are similar to those in Annabi et al (2010). The firm is financed with a total coupon of 10.…”

Section: Model Calibrationmentioning

confidence: 99%

“…Specifically, we adapt the game theoretic modelling of Annabi et al (2010) to a case where different types of players (shareholders, creditors, or Court-appointed trustee) have the opportunity to propose a first reorganization plan, submitted to a voting procedure.…”

Section: Introductionmentioning

confidence: 99%

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Game theoretic analysis of negotiations under bankruptcy

Annabi

Breton

François

2012

European Journal of Operational Research

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Abstract:We extend the contingent claims framework for the levered firm in explicitly modeling the resolution of financial distress under formal bankruptcy as a non-cooperative game between claimants under the supervision of the bankruptcy judge. The identity of the class of claimants proposing the first reorganization plan is found to be a key determinant of the likelihood of liquidation and of the renegotiated value of claims. Our quantitative results confirm the economic intuition that a bankruptcy design must tradeoff the initial priority of claims with the viability of reorganized firms.

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Section: Continuation Valuesmentioning

confidence: 99%

Section: Model Calibrationmentioning

confidence: 99%

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Game theoretic analysis of negotiations under bankruptcy

Annabi

Breton

François

2012

European Journal of Operational Research

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“…These papers incorporate important aspects of the Chapter 11 code, e.g., the automatic stay, but a successful exit of Chapter 11 does not solve the underlying capital structure (financial distress) problem. Annabi et al (2010) consider the outcome of Chapter 11 as a non-cooperative game. They focus on the judge's role, and the random intervention leads to a game in multiple rounds, but they do not consider the firm's optimal capital structure.…”

Section: Introductionmentioning

confidence: 99%

Dynamic capital structure with callable debt and debt renegotiations

Christensen

Flor

Lando

et al. 2014

Journal of Corporate Finance

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We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.JEL classification: G32, G33, G13

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“…Contingent claims models are a well accepted approach to explore agent behaviour under various scenarios. Such models have been used to analyze creditor-equityholder bargaining (Anderson and Sundaresan, 1996;Annabi, Breton, and Francois, 2010), entrepreneurial decision making (Mcgrath, 1999;O'Brien, Folta, and Johnson, 2003), and optimal project abandonment (Myers and Majd, 1990), among other applications.…”

Section: The Modelmentioning

confidence: 99%

Three essays on corporate finance modelling

Brotchie¹

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In this thesis I use mathematical modelling techniques to further our understanding of three outstanding corporate finance problems. In each case, I derive a novel model of agent behaviour, calculate an efficient numerical solution, and then explore how the model informs theory and practice. I present my contributions to each problem as separate selfcontained essays. In my third essay I derive a global asset pricing model with endogenous home preference that contains a small open economy with a dividend imputation tax system; Dividend imputation eliminates double taxation by attaching tax credits to distributed dividends for already paid company tax. Domestic investors can use these credits to reduce their personal taxes, while credits are useless to foreign investors. The interplay between imputation eligible domestic investors and ineligible foreign investors makes it difficult to value imputation credits. My model assumes that home bias arises endogenously from the status quo and endowment effect behavioural biases. I find that these biases interact with dividend imputation to drive domestic investors to hold highly concentrated domestic portfolios. I also find that risk-averse domestic investors cannot fully capture the value of imputation credits because concentrating their holdings in the domestic market reduces their diversification.

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Resolution of Financial Distress Under Chapter 11

Abstract: We would like to thank Jan Ericsson, Jean Helwege and Franck Moraux for their useful comments. We also thank Ali Boudhina for excellent research assistance. Annabi and Breton acknowledge financial support from IFM 2 and NSERC. François acknowledges financial support from SSHRC.

Cited by 8 publications

References 28 publications

Game theoretic analysis of negotiations under bankruptcy

Game theoretic analysis of negotiations under bankruptcy

Dynamic capital structure with callable debt and debt renegotiations

Three essays on corporate finance modelling

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