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Financial Distress and Reputational Concerns

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  • Hind Sami

    () (GATE CNRS)

Abstract

This article examines the interaction between the restructuring process of a financially distressed firm and the behavior of its manager. We analyze a situation in which a bank decides to offer a renegotiation to a distressed firm, yet the manager is reluctant to implement a restructuring even when this would be efficient. We show that a combination of factors, including the bank's monitoring activity and managers' reputational concerns, can explain the reluctance of managers to accept a renegotiation. We analyze the optimal renegotiation o¤er in such a setting and derive some implications about the design of firms. Our model predictions about managers' behavior under reputational concerns are able to match important stylized empirical facts. In particular, Hotchkiss (1995) documents the failure to get distressed firms to provide disclosure statement and to efficiently restructure. While her explanation relates to the US bankruptcy design that allows management to make inefficient self-serving decisions, ours emphasizes managers' reputational concerns.

Suggested Citation

  • Hind Sami, 2005. "Financial Distress and Reputational Concerns," Working Papers 0509, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:0509
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    File URL: ftp://ftp.gate.cnrs.fr/RePEc/2005/0509.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Asymmetric information; Financial distress; Renegotiation;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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