Corporate reorganization under Chapter 11 of the Bankruptcy Code is built on the foundation of the absolute priority rule, which requires that senior creditors be paid in full before any value can be distributed to junior creditors. The standard law and economics understanding is that absolute...

While credit risk transfer market dramatically increases the complexity of lender's incentive structure and above all reduces the incentives of the bank to monitor debtor, a ‘harsh' bankruptcy environment (as evidenced in the shift from the debtor controlled to creditor controlled...