The Choice between Reorganization and Deferred Payment for Troubled Businesses

Jue-Shyan Wang and Pei-Hsin Tsai
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Jue-Shyan Wang: Department of Public Finance, National Chengchi University, Taiwan
Pei-Hsin Tsai: Department of Public Finance, National Chengchi University, Taiwan

Journal of Economics and Management, 2009, vol. 5, issue 1, 83-110

Abstract: A solid and sound bankruptcy system is a crucial pillar that is needed to sustain the stability of any competitive, free-market economy and to protect any highly-developed financial market from serious crashes. When faced with the demands of creditor banks, a firm in financial distress will usually prefer to negotiate an informal arrangement of deferred payments rather than to go directly into a formal bankruptcy process. This paper considers small firms and sets up two systems of game-theoretic models. Furthermore, this paper utilizes backward induction, which starts from the last period, to obtain the solution. We discuss the optimal strategy for distressed firms choosing between bankruptcy and a debt negotiation in which the payment date is postponed for one period.

Keywords: financial distress; bankruptcy; reorganization; deferred payment (search for similar items in EconPapers)
JEL-codes: C72 M21 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:5:y:2009:i:1:p:83-110

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