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Strategic managerial dishonesty and financial distress

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  • Besancenot, Damien
  • Vranceanu, Radu

Abstract

This paper analyzes the effect of stricter sanctions against fraudulent disclosure in an economy where commercial lenders have only an imperfect information about the type of the firm they trade with. In the hybrid Bayesian equilibrium, some managers running fragile firms claim that their firm is solid only to benefit of better commercial credit terms. The default premium charged by the supplier over the normal cost can be interpreted here as an indirect bankruptcy cost. When the sanction gets heavier, both the default premium and the frequency of defaulting firms go up. Under given circumstances, these perverse effects might be offset by a decline in direct bankruptcy costs.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 63 (2009)
Issue (Month): 1 (March)
Pages: 11-21

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Handle: RePEc:eee:reecon:v:63:y:2009:i:1:p:11-21

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Web page: http://www.elsevier.com/locate/inca/622941

Related research

Keywords: Financial distress Bankruptcy costs Disclosure Corporate regulation Hybrid Bayesian equilibrium;

References

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  1. Gregor Andrade & Steven N. Kaplan, 1997. "How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," NBER Working Papers 6145, National Bureau of Economic Research, Inc.
  2. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
  3. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
  4. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
  5. Joel S. Demski, 2003. "Corporate Conflicts of Interest," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 51-72, Spring.
  6. Besancenot, Damien & Vranceanu, Radu, 2007. "Equilibrium (dis)honesty," Journal of Economic Behavior & Organization, Elsevier, vol. 64(2), pages 232-249, October.
  7. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, 06.
  8. Zhang, Ivy Xiying, 2005. "Economic Consequences of the Sarbanes-Oxley Act of 2002," Working paper 175, Regulation2point0.
  9. Wruck, Karen Hopper, 1990. "Financial distress, reorganization, and organizational efficiency," Journal of Financial Economics, Elsevier, vol. 27(2), pages 419-444, October.
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