Abstract

The conventional wisdom among bankruptcy courts and scholars is that equity investment in a distressed corporate enterprise is worthless. Starting from the option-like characteristic of the equity holders’ position this Article calls into question that assumption and argues in favour of a valuation methodology which takes into consideration the re-organizational surplus value of the firm. This approach is both consistent with the principles of European and Italian constitutional law aiming at protecting property rights and with the public policy goal of providing the shareholders with desirable incentives to promote an early management of the crisis whenever the «going concern value» of the business exceeds its «liquidation value». The conclusion sketches the basis for a new understanding of the debt-equity swap transaction as a method for reallocating ownership interests in the reorganized firm.