Voluntary Bankruptcy as Preemptive Persuasion

Nikolay Dinev
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Nikolay Dinev: Vienna Graduate School of Finance (VGSF)

No 334, Economics Series from Institute for Advanced Studies

Abstract: 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.

Keywords: Bayesian Persuasion; Bankruptcy; Chapter 11; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: C72 D21 D72 D82 D83 G33 K20 K40 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2017-12
New Economics Papers: this item is included in nep-cfn, nep-gth, nep-law and nep-mic
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https://irihs.ihs.ac.at/id/eprint/4466 First version, 2017 (application/pdf)

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