Theory Seminar (Sigurdsson)

Original article (link) posted: 05/10/2005

Sigurdsson (2005) "Auctions as Mechanism: An Application to Bankruptcy Reorganization" Job Market Paper

In the paper, he proposes the new mechanism of reorganization of firms in cases of bankruptcy. As a matter of fact, a firm that files for bankruptcy must either liquidate under Chapter 7 of the Bankruptcy Code or reorganize under Chapter 11. The distribution follows the absolute value priority rule (APR) which states that no creditor shall receive any value until all claims senior to his have been paid in full. Legal scholars have proposed several mechanisms as alternatives to the current system of judicially supervised bargaining, widely believed to be costly, lengthy, and to result in inefficient capital structures and violations of the APR. A major drawback of those proposals is their reliance on cash payments.
In the mechanism he proposes, the entire reorganized firm is sold in a cash auction and the proceeds are distributed to creditors according to the APR. He mentions 4 advantages of his mechanism. That is, the mechanism
1) implements the APR for far more general capital structures than the simple debt and equity structures assumed in previous mechanisms.
2) all but eliminates the need for cash payments and therefore works under tight financial constraints.
3) offers the advantage of familiarity over its more novel competitors in an auction.
4) allocates ownership efficiently when creditors do not agree on the firm's value.

It seemed that the participants of the seminar liked his paper. Hope he will get a good job!!
By the way, his main advisor is Eric Maskin. I heard a rumor that he did not take a student, but it should be wrong. I would like to talk to him about my research too.

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