The Economics of Bankruptcy Reform

Philippe Aghion, Oliver Hart, John Moore

NBER Working Paper No. 4097
Issued in June 1992
NBER Program(s):   CF

We propose a new bankruptcy procedure. Initially, a firm's debts are cancelled, and cash and non-cash bids are solicited for the 'new" (all-equity) firm. Former claimants are given shares, or options to buy shares, in the new firm on the basis of absolute priority. Options are exercised once the bids are in. Finally, a shareholder vote is taken to select one of the bids. In essence, our procedure is a variant on the U.S. Chapter 7, in which non-cash bids are possible; this allows for reorganization. We believe our scheme is superior to Chapter 11 since it is simpler, quicker, market-based, avoids conflicts, and places appropriate discipline on management.

(409 K)

Published:

• Journal of Law, Economics, and Organization, vol. 8, no. 3, (October 1992), pp. 523-546 ,
• The Economics of Bankruptcy Reform, Philippe Aghion, Oliver D. Hart, John Moore, in The Transition in Eastern Europe, Volume 2: Restructuring (1994), University of Chicago Press
  

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