Debt reorganization strategies with complete verification under information asymmetry

Shibata, Takashi; Tian, Yuan
April 2012
International Review of Economics & Finance;Apr2012, Vol. 22 Issue 1, p141
Academic Journal
Abstract: 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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