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Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11
Author(s) -
BROADIE MARK,
CHERNOV MIKHAIL,
SUNDARESAN SURESH
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01238.x
Subject(s) - ex ante , debt , equity (law) , monetary economics , control (management) , economics , benchmark (surveying) , value (mathematics) , business , interest rate , financial system , finance , political science , macroeconomics , management , geodesy , machine learning , computer science , law , geography
Explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders. In the first–best outcome, reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improved overall firm value. If control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers, most of the benefits 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. Reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only.