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Voluntary Bankruptcy as Preemptive Persuasion

Author

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  • Dinev, Nikolay

    (Vienna Graduate School of Finance (VGSF))

Abstract

This paper examines the phenomenon of management-initiated, court-supervised reorganization of companies in U.S. bankruptcy court. The proposed in-court persuasion mechanism reconciles excessive reorganizations of non-viable companies (and subsequent repeat failures) with management-initiated filings and a judge who aims to always take appropriate action. In the model, management makes a preemptive voluntary filing to retain control of the process, and thereby engage in a game of Bayesian Persuasion with asymmetric information vis-à-vis the judge. This mechanism endogenously results in the reorganization of some non-viable companies, and exclusively management-initiated (i.e., voluntary) bankruptcy filings. This paper, therefore, explains why non-viable companies could be permitted to reorganize and why there are repeat offender firms that enter bankruptcy multiple times.

Suggested Citation

  • Dinev, Nikolay, 2017. "Voluntary Bankruptcy as Preemptive Persuasion," Economics Series 334, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:334
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-334.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bayesian Persuasion; Bankruptcy; Chapter 11; Asymmetric Information;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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