The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations

Berkovitch, Elazar; Israel, Ronen; Zender, Jaime F.

doi:10.2307/2331127

Cited by 89 publications

(46 citation statements)

References 25 publications

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“…Under this scheme, tort claimants would be paid before creditors. The entrepreneur's expected payoff in this setting is unaltered and continues to be described by (6). The lender's expected payoff is modified, however, and can be written as…”

Section: Priority For Tort Claimsmentioning

confidence: 99%

“…They show that granting priority to the tax authority is ex ante efficient in that it reduces the incentive for firms to engage in claims substitution. In Berkovitch, Israel, and Zender [5] [6] deviation from AP increases the entrepreneur's incentive to exert effort by protecting the sunk investment. Heinkel and Zechner [7], Kalay and Zender [8], and Berkovitch and Israel [9] [10] focus on the interaction between bankruptcy and the flow of information.…”

Section: Introductionmentioning

confidence: 99%

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On Deviating from Absolute Priority: The Case of Tort Claims and Active Creditors

Anyangah¹

2017

TEL

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The impact of deviating from absolute priority rule, a basic tenet of bankruptcy law that accords secured creditors a privileged position in bankruptcy distribution, has long been at the centre of research on bankruptcy. This paper develops a model of a firm that can cause an accident and then claim bankruptcy to investigate the ex ante effects of elevating tort claims a head of creditors. In the model, the firm (or its manager) controls an unobservable care (or effort) decision. The creditor not only provides the requisite capital, but also exercises control over the firm by virtue of its significant cash flow rights. Together managerial care and creditor control determine the distribution of the tortious harm. We find that according tort claims a privileged position relative to creditors leads to a shift away from managerial care and towards more creditor control. As a consequence, subordinating secured creditor has an ambiguous effect on the expected social welfare.

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Section: Priority For Tort Claimsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

On Deviating from Absolute Priority: The Case of Tort Claims and Active Creditors

Anyangah¹

2017

TEL

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“…In contrast to Giammarino (1989) who argues that informational asymmetries increase the number 1 This …rst plan is in the best interests of shareholders as we abstract from agency con ‡icts between claimants. 2 Berkovitch, Israel and Zender (1998) show that judge interference in the procedure is a direct restriction on the bargaining game that prevents claimholders from acting too strategically. 3 One exceptional case of asset stripping is the failure of Eastern Airlines documented by Weiss and Wruck (1998).…”

Section: Related Literaturementioning

confidence: 99%

Resolution of financial distress under Chapter 11

Annabi

Breton

François

2012

Journal of Economic Dynamics and Control

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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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“…16 See Aghion and Bolton (1991), Aghion, Hart, and Moore (1992), Berkovitch, Israel, and Zender (1993), and Berger and Udell (1992).…”

Section: Conclusion and Empirical Implicationsmentioning

confidence: 99%

Credit Rationing, Bankruptcy Cost, and the Optimal Debt Contract for Small Business

Yan¹

1997

Working Paper (Federal Reserve Bank of Cleveland)

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This paper examines whether the costly random verification scheme affects the optimal debt contract for small business. It finds, contrary to Townsend (1979) and Williamson (1986, that the standard debt contract is the optimal debt contract with the costly random verification scheme. Credit rationing, characterized as a loan granted in an amount less than requested, becomes more severe as the bankruptcy cost rises. This result supports the 1994 amendments to the Bankruptcy Code, since it shows that simplifying the bankruptcy procedure for small business reduces credit rationing and therefore enhances lending.

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The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations

Cited by 89 publications

References 25 publications

On Deviating from Absolute Priority: The Case of Tort Claims and Active Creditors

On Deviating from Absolute Priority: The Case of Tort Claims and Active Creditors

Resolution of financial distress under Chapter 11

Credit Rationing, Bankruptcy Cost, and the Optimal Debt Contract for Small Business

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