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Corporate Bankruptcies, Liquidation Costs and the Role of Banks

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  • Ozkan, Aydin
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    Abstract

    This paper develops a reputation model to discuss the role of banks in the corporate bankruptcy process. Financially distressed firms either default on their current obligations or liquidate themselves voluntarily. Banks, who interact repeatedly in the debt market, either reduce the obligations of troubled firms or pursue liquidation. The strategy of banks is determined by a trade-off between acquiring a reputation for being tough against financially distressed firms (but incurring liquidation costs) and reducing firms' obligations so as to increase the proportion of repayment (but weakening the position against future defaults). The model shows that small firms are more likely to be liquidated when they are in financial distress than larger firms. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester

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    Bibliographic Info

    Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

    Volume (Year): 64 (1996)
    Issue (Month): 0 (Suppl.)
    Pages: 104-19

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    Handle: RePEc:bla:manch2:v:64:y:1996:i:0:p:104-19

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    Cited by:
    1. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    2. Declerck, Francis & Viviani, Jean-Laurent, 2010. "Solvency and Performance of French Wineries in Times of Declining Sales: Co‐operatives and Corporations," 2010 Internatonal European Forum, February 8-12, 2010, Innsbruck-Igls, Austria 100507, International European Forum on Innovation and System Dynamics in Food Networks.
    3. Serrano Cinca, C. & Mar Molinero, C. & Gallizo Larraz, J.L., 2005. "Country and size effects in financial ratios: A European perspective," Global Finance Journal, Elsevier, vol. 16(1), pages 26-47, August.

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