Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law

Abstract

When a firm is in financial distress, in most cases a set of mutually advantageous reorganization plans exist. This article shows that the bankruptcy code, by providing rules governing the negotiation process, yields a unique solution to the reorganization process. In addition, the structure imposed by the code mitigates the holdout problem created by the individual claimant's divergent incentives.