The Choice between Reorganization and Deferred Payment for Troubled Businesses
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.
Volume (Year): 5 (2009)
Issue (Month): 1 (January)
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