Financial Distress as a Noncooperative Game: A Proposal for Overcoming Obstacles to Private Workouts

Abstract

In the past several years, academics have increasingly expressed dissatisfaction with Chapter 11.' Among other complaints, critics point out that reorganizations of major public companies are expensive and usually take a number of years to complete.' In addition, from the scant empirical information available, failure rates appear high. One study shows that 38.3% of reorganized companies liquidate within four years.3 Accordingly, academic writers have cast about for alternatives to court-supervised reorganizations. Suggestions include proposals for an all-equity capital structure, market-based solutions like mandatory auctions,5 and measures designed to encourage private workout agreements which avoid the need for judicial supervision altogether.6