Creditor Coordination, Liquidation Timing, and Debt Valuation

Max Bruche

17 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Insolvency and Governance Corporate Finance and Governance Financial Distress and Bankruptcy Prediction

Abstract

Abstract This paper derives closed-form solutions for values of debt and equity in a continuous-time structural model in which the demands of creditors to be repaid cause a firm to be put into bankruptcy. This allows discussion of the effect of creditor coordination in recovering money on the values of debt, equity, and the firm, as well as on optimal capital structure. The effects of features of bankruptcy codes that prevent coordination failures between creditors, such as automatic stays and preference law, are also considered. The model suggests that such features, while preventing coordination failures, can decrease welfare.

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References

1998Law and Finance 1995Firms, Contracts, and Financial Structure 1994Corporate Debt Value, Bond Covenants, and Optimal Capital Structure 1996Law and Finance 1984The effect of capital structure on a firm's liquidation decision 1996Optimal Debt Structure and the Number of Creditors 2005Demand–Deposit Contracts and the Probability of Bank Runs 2006The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization

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