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The Choice between Reorganization and Deferred Payment for Troubled Businesses

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  • Jue-Shyan Wang

    (Department of Public Finance, National Chengchi University, Taiwan)

  • Pei-Hsin Tsai

    (Department of Public Finance, National Chengchi University, Taiwan)

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    Abstract

    A solid and sound bankruptcy system is a crucial pillar that is needed to sustain the stability of any competitive, free-market economy and to protect any highly-developed financial market from serious crashes. When faced with the demands of creditor banks, a firm in financial distress will usually prefer to negotiate an informal arrangement of deferred payments rather than to go directly into a formal bankruptcy process. This paper considers small firms and sets up two systems of game-theoretic models. Furthermore, this paper utilizes backward induction, which starts from the last period, to obtain the solution. We discuss the optimal strategy for distressed firms choosing between bankruptcy and a debt negotiation in which the payment date is postponed for one period.

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    Bibliographic Info

    Article provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.

    Volume (Year): 5 (2009)
    Issue (Month): 1 (January)
    Pages: 83-110

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    Handle: RePEc:jec:journl:v:5:y:2009:i:1:p:83-110

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    Related research

    Keywords: financial distress; bankruptcy; reorganization; deferred payment;

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