Debt reorganization strategies with complete verification under information asymmetry

Takashi Shibata () and Yuan Tian

International Review of Economics & Finance, 2012, vol. 22, issue 1, 141-160

Abstract: This paper examines optimal debt reorganization strategies in the presence of agency problems arising from information asymmetry between a firm and a bank during financial distress. In particular, in the structural model, we incorporate complete verification strategies for private information that the firm holds under information asymmetry. We show that under complete verification strategies, the agency conflict because of information asymmetry delays the debt reorganization, leading to a decrease in equity and debt values. These results fit well with the findings of previous empirical works in this area.

Keywords: Real options; Agency problem; Formal and private debt reorganization; Randomized strategies (search for similar items in EconPapers)
JEL-codes: D82 G13 G33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:22:y:2012:i:1:p:141-160

DOI: 10.1016/j.iref.2011.09.007

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