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An analysis of bankruptcy bargaining in the U.S.

by Maria Carapeto of Cass Business School

October 6, 2003

Abstract: In this paper I analyze the bankruptcy bargaining process in pre-packs and conventional Chapter 11s using a large sample of firms that filed for Chapter 11 and successfully emerged. I test empirically a bargaining model where unsecured creditors have a credible outside option, given by the liquidation value of their claims and modeled as a proportion of the amounts they are owed. There is evidence that in prepacks unsecured creditors' payments depend only on the value of the outside option. However, in conventional Chapter 11s they obtain, in addition, a percentage of what is left to distribute, which confirms the larger likelihood of a breakdown in the negotiations in these cases. I also distinguish between firms with one plan of reorganization and those with multiple plans of reorganization. Although the bankruptcy process is faster for single-plan firms, the time until their plan of reorganization is significantly longer than that for the first plan of reorganization of multiple-plan firms. This finding is consistent with claimants having a lower valuation regarding single-plan firms, thus strategically delaying making the first offer.

JEL Classification: C72, C78, G33.

Keywords: Bankruptcy, Bargaining, Pre-pack, Conventional Chapter 11, Strategic delay.

Published in: Journal of Corporate Finance, Vol. 11, No. 4, (September 2005), pp. 736-746.

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