Corporate Bankruptcy Reorganizations: Estimates from a Bargaining Model
by Hülya K. K. Eraslan of the University of Pennsylvania
May 17, 2007
Abstract: When a firm les for Chapter 11 bankruptcy in the U.S., negotiations take place among its claimants to decide what to do with the firm and who gets what. If an agreement cannot be reached, then the firm is likely to be liquidated. Consequently, the liquidation value of the firm plays a crucial role in the deal that is struck among the claimants. In this paper, I use a novel approach to measure the unobserved liquidation value of a firm that relies on the information contained in the allocations that are agreed upon in Chapter 11 negotiations. I do so by estimating a game theoretic model that captures the influence of liquidation value on the equilibrium allocations using a newly collected data set. I find that the liquidation values are higher when the industry conditions are more favorable, and the real interest rates are higher. I use the estimated model to conduct a counterfactual experiment to quantitatively assess the impact of a mandatory liquidation on the equilibrium allocations.
Published in: International Economic Review, Vol. 49, No. 2, (May 2008), pp. 659-681.