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Corporate Bankruptcies, Liquidation Costs and the Role of Banks

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  • Ozkan, Aydin

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

Suggested Citation

  • Ozkan, Aydin, 1996. "Corporate Bankruptcies, Liquidation Costs and the Role of Banks," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 104-119, Suppl..
  • 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. Shoaib Ali & Attiya Yasmin Javid, 2015. "Relationship between Credit Rating, Capital Structure and Earning Management Behaviour: Evidence from Pakistani Listed Firms," PIDE-Working Papers 2015:121, Pakistan Institute of Development Economics.
    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.
    4. Declerck, Francis & Viviani, Jean-Laurent, 2012. "Solvency and Performance of French Wineries in Times of Declining Sales: Co-operatives and Corporations," International Journal on Food System Dynamics, International Center for Management, Communication, and Research, vol. 3(2).

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