the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search


Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- Text (plain)
- BibTeX

Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11

by Mark Broadie of Columbia University,
Mikhail Chernov of Columbia University, and
Suresh Sundaresan of Columbia University

May 2006

Abstract: Explicit presence of a reorganization process in addition to liquidation can lead to conflicts of interest between borrowers and lenders. In the first-best outcome, the reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improvement in the overall firm value. If control of the ex-ante timing of reorganization and the ex-post decision to liquidate is given to borrowers, most of the benefits of the code 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. On average, firms are more likely to default and are less likely to liquidate relative to the benchmark case with liquidation only.

Published in: Journal of Finance, Vol. 62, No. 3, (June 2007), pp. 1341-1377.

Books Referenced in this paper:  (what is this?)

Download paper (376K PDF) 52 pages