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.
Mark Broadie, Mikhail Chernov, and M. Suresh Sundaresan. "Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11." Journal of Finance 62, no. 3 (2007): 1341-1377.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.