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Debt reorganization strategies with complete verification under information asymmetry

  • Shibata, Takashi
  • Tian, Yuan

This paper examines optimal debt reorganization strategies in the presence of agency problems arising from information asymmetry between a firm and a bank during financial distress. In particular, in the structural model, we incorporate complete verification strategies for private information that the firm holds under information asymmetry. We show that under complete verification strategies, the agency conflict because of information asymmetry delays the debt reorganization, leading to a decrease in equity and debt values. These results fit well with the findings of previous empirical works in this area.

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Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 22 (2012)
Issue (Month): 1 ()
Pages: 141-160

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Handle: RePEc:eee:reveco:v:22:y:2012:i:1:p:141-160
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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