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Debt renegotiation under reputation concerns and tolerance for failure

Hind Sami

Managerial and Decision Economics, 2020, vol. 41, issue 1, 36-48

Abstract: We propose a career concern model where a privately informed entrepreneur reports the firm financial situation. On this basis, the creditor may offer debt renegotiation. Due to reputation concerns, the entrepreneur may feel reluctant to restructure and may manipulate information. We analyze how creditor attitude towards failure and entrepreneurs reputation concerns interact and influence the restructuring decision. We show that debt renegotiation under more lenient conditions discourages manipulation because entrepreneurs are ensured that their reputation will not suffer from revealing financial difficulties. Intolerant creditors make entrepreneurs more concerned about reputation weakening their incentives to restructure, leading to inefficient continuation of investments.

Date: 2020
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Handle: RePEc:wly:mgtdec:v:41:y:2020:i:1:p:36-48