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Is Bargaining in Chapter 11 Costly?

by Maria Carapeto of Cass Business School

October 6, 2003

Abstract: This paper investigates the issue of bankruptcy costs in multiple-plan Chapter 11s. I concentrate on the first (rejected) and last (effective) plans of reorganization and find that the distribution to claimants shrinks by 6.5% during this period of extended bargaining, inducing extra bankruptcy costs of 2.8% of assets. Unsecured creditors constitute the driving force in the negotiation, as they seem to reject plans with unfavorable deviations from absolute priority. In this way, they cause delay in the negotiations, even if they risk ending up with a lower recovery due to firm value erosion along with other classes of claimants.

JEL Classification: C72, C78, G33.

Keywords: Bankruptcy costs, Bargaining, Recovery rates, Deviations from absolute priority, Multiple-plan firms, Single-plan firms.

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