Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders
Michi Nishihara () and
Takashi Shibata ()
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Michi Nishihara: Graduate School of Economics, Osaka University
No 17-18, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics
We develop a dynamic model in which a distressed firm optimizes the bankruptcy choice and its timing. When the distressed firm fs shareholders sell the assets, they are better informed about the asset value than outsiders are. We show that this asymmetric information can delay the asset sales to signal asset quality to outsiders. More debt and lower asset value can reduce the signaling cost and mitigate the asset sales delay. Notably, we show that the firm changes the bankruptcy choice from selling out to liquidation bankruptcy when the signaling cost associated with selling out is high. This distortion in the bankruptcy choice greatly lowers the debt value, whereas it has a weak impact on the equity value.
Keywords: bankruptcy; adverse selection; asymmetric information; signaling game; real options; M&A (search for similar items in EconPapers)
JEL-codes: D82 G13 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-mic
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Journal Article: Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1718
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