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Debt renegotiation and entrepreneurial optimism

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  • Ivana Vitanova

    (COACTIS - Université Lumière - Lyon II : EA4161 - Université Jean Monnet - Saint-Etienne)

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    Abstract

    This paper studies the effect of entrepreneurial optimism on the renegotiation procedure outcome in the case of financially distressed companies. We model a three actor renegotiation procedure whit a realistic bank, an optimistic entrepreneur and a trade supplier (who is an optimistic entrepreneur himself). We show that optimism enables a renegotiation procedure even when immediate liquidation is socially optimal. We also show that realistic actors (banks) can exploit the divergence in beliefs with optimistic entrepreneurs in order to obtain premature repayment, while optimistic trade suppliers support the company since they believe that the project has great chances to succeed. Hence, we explain by this idea some empirical evidence over private renegotiation results and player's behavior.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00591059.

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    Date of creation: 11 May 2011
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    Publication status: Published - Presented, 28th International Conference of French Finance Association, 2011, Montpellier, France
    Handle: RePEc:hal:journl:halshs-00591059

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00591059
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    Related research

    Keywords: optimism; debt renegotiation;

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    1. Michael Manove & A. Jorge Padilla & Marco Pagano, 1998. "Collateral vs. Project Screening: A Model of Lazy Banks," CSEF Working Papers 10, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
    3. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-91.
    4. Mathew L. A. Hayward & Dean A. Shepherd & Dale Griffin, 2006. "A Hubris Theory of Entrepreneurship," Management Science, INFORMS, vol. 52(2), pages 160-172, February.
    5. David Dickinson, 2003. "The Chilling Effect Of Optimism: The Case of Final-Offer Arbitration," Working Papers 2003-01, Utah State University, Department of Economics.
    6. Ali, S. Nageeb M., 2006. "Waiting to settle: Multilateral bargaining with subjective biases," Journal of Economic Theory, Elsevier, vol. 130(1), pages 109-137, September.
    7. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
    8. Hotchkiss, Edith Shwalb, 1995. " Postbankruptcy Performance and Management Turnover," Journal of Finance, American Finance Association, vol. 50(1), pages 3-21, March.
    9. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
    10. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, 02.
    11. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
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