Thispaperadoptstherealoptionsapproachtostudythedecision-makingofcorporateendogenousbankruptcyanddebtreorganizationinarisk-neutralframework,whileunderstandingcorporatebankruptcyanddebtreorganizationastheoptionsheldbyequityholdersandthecreditor.Afterobtainingthevaluesofcontingentclaimsonthecorporateassets,thepaperanalyzesthebankruptcydecisionsofdifferentleveredcorporate.Withstandarddebtcontractandunderabsolutepriorityrule,thebankruptcytimesmaximizingtheequityvaluearenotconsistentwiththosemaximizingthecorporatevalue:thehighleveredcorporatewillinefficientlybankruptearlywhilethelowleveredcorporatewillinefficientlybankruptlate.Ifdebtreorganizationorcreditorconcessionisn'tallowed,liquidationoftenleadstothelossinvalue.Butifstrategicdefaultordeviationfromabsolutepriorityruleisallowed,thedecisionmaximizingtheequityvaluewillbeconsistentwiththatmaximizingthecorporatevalue.Debtreorganizationhassignificanteconomicimplication:forhighleveredcorporateorlowleveredcorporate,withdebtreorganizationordeviationoftheabsolutepriorityrulepermitted,postponedorhastenedbankruptcycanbeavoided,hence,thebankruptcytriggerchosenbyequityholderstomaximizetheequityvalueisefficientdecisionwithoutvaluelosses.
