Debt restructuring and voting rules Preliminary and incomplete

The voting arrangements used by creditors during debt restructuring are prespecified, often by statute. For example, U.S. law stipulates the use of a unanimous vote outside bankruptcy, but a supermajority vote in Chapter 11 bankrupcty. We analyze the effect of voting rules on the welfare of debtors and their creditors in restructuring negotiations. When creditors are close to rational and markets are liquid, the “toughness” engendered by a requirement of unanimous agreement benefits creditors by more than the rise in the probability of disagreement hurts them. Conversely, if markets are illiquid or creditors are far from rational, a unanimity requirement makes successful restructuring almost impossible, hurting creditors and the debtor alike. We apply our results to U.S. regulations governing debt restructuring, and to the current debate on the desirability of a sovereign debt restructuring mechanism. On a more technical level, our analysis extends the existing strategic voting literature (see especially Feddersen and Pesendorfer 1997) to the case in which the issue being voted over is endogenous to the voting rule used.