Voluntary Bankruptcy as Preemptive Persuasion

Dinev, Nikolay (December 2017) Voluntary Bankruptcy as Preemptive Persuasion. Former Series > Working Paper Series > IHS Economics Series 334, 38 p.

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This paper examines the phenomenon of management-initiated, court-supervised reorganization of companies in U.S. bankruptcy court. The proposed in-court persuasion mechanism reconciles excessive reorganizations of non-viable companies (and subsequent repeat failures) with management-initiated filings and a judge who aims to always take appropriate action. In the model, management makes a preemptive voluntary filing to retain control of the process, and thereby engage in a game of Bayesian Persuasion with asymmetric information vis-à-vis the judge. This mechanism endogenously results in the reorganization of some non-viable companies, and exclusively management-initiated (i.e., voluntary) bankruptcy filings. This paper, therefore, explains why non-viable companies could be permitted to reorganize and why there are repeat offender firms that enter bankruptcy multiple times.

Item Type: IHS Series
Keywords: Bayesian Persuasion, Bankruptcy, Chapter 11, Asymmetric Information
Research Units: Former Research Groups (until 2017) > Financial Markets and Econometrics
Date Deposited: 09 Jan 2018 14:05
Last Modified: 27 Sep 2019 06:03
ISSN: 1605-7996
URI: https://irihs.ihs.ac.at/id/eprint/4466

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