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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

Abstract: 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
Date: 2017-07
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