Strategic managerial dishonesty and financial distress
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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- Stephen Morris & Hyun Song Shin, 1999.
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Cowles Foundation Discussion Papers
1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
- Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
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- Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241, Cowles Foundation for Research in Economics, Yale University.
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- 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.
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