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The Choice between Reorganization and Deferred Payment for Troubled Businesses

Author

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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)

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.

Suggested Citation

  • Jue-Shyan Wang & Pei-Hsin Tsai, 2009. "The Choice between Reorganization and Deferred Payment for Troubled Businesses," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(1), pages 83-110, January.
    • Handle: RePEc:jec:journl:v:5:y:2009:i:1:p:83-110
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    More about this item

    Keywords

    financial distress; bankruptcy; reorganization; deferred payment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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