9320845 Hart This project continues research on the financial structure of firms and bankruptcy reform that were stimulated by and are relevant to the political and economic changes in Eastern Europe and the Former Soviet Union. Specifically, the investigator and collaborators have devised new bankruptcy procedures which appear to be superior to Chapters 7 and 11 of the U.S. Bankruptcy Code. This project will study theoretical and practical questions raised by the procedure. The investigator will also continue work on entrepreneurial debt contracts, corporate financial structure and the theory of the firm. Under the previous project the investigator studied bankruptcy procedure as part of the transitions to capitalism in Eastern Europe and the Former Soviet Union. This research led to a new bankruptcy procedure that the investigators found to be superior to existing procedures. Under this bankruptcy procedure, a bankrupt firm's debts are cancelled, all the equity is given to the former creditors and these creditors as the new owners decide whether the firm should be sold off for cash or reorganized as a going concern. The judge supervising the procedure solicits cash and noncash bids. In a noncash bid, someone offers securities in the post-bankruptcy firm instead of cash. For example, the old management team or a new management team could offer the new owners of the firm a combination of shares and bonds in the post-bankruptcy firm. The creditors would decide by a simple majority vote which bid to select. The firm then exits from bankruptcy. This procedure is superior to existing bankruptcy law because it transforms a group of people with different claims and therefore different objectives into a homogeneous class of shareholders with a common objective (value maximization) and then puts the firm's future to a simple majority vote. The procedure avoids costly and inefficient haggling over the division of the assets of a bankrupt firm be cause it provides a mechanical procedure for the division of the pie. This project pursues a number of extensions and elaborations of the proposed procedure. These extensions include analysis of alternative voting arrangements, more precise estimates of the benefits of adopting this new procedure, and an ambitious effort to derive optimal bankruptcy procedures in an incomplete contracting setting.
