Using options to divide value in corporate bankruptcy

This paper revisits the proposal to use options in corporate bankruptcy tha t was put forward in Bebchuk (1988). According to the proposed procedure, c orporate bankruptcy should be implemented through the distribution to parti cipants of appropriately designed options. The paper starts by discussing t he goals that should guide the design of bankruptcy procedures. The paper t hen explains how the options procedure can improve both ex post efficiency and ex ante efficiency. The paper offers a refined version of the procedure , and it also responds to questions that have been raised regarding the exe cution and desirability of the procedure. The paper concludes by explaining the relationship between the options approach to corporate bankruptcy and the Black-Scholes characterization of all corporate securities as options. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: G3; G33; K2.