Heterogeneous Beliefs and the Choice between Private Restructuring and Formal Bankruptcy

33 Pages Posted: 27 Nov 2013 Last revised: 13 Dec 2016

See all articles by Pascal Francois

Pascal Francois

HEC Montreal - Department of Finance

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Date Written: December 8, 2016

Abstract

We present a theory for the puzzling issue regarding why certain firms in financial distress, prefer a costlier formal bankruptcy procedure over direct renegotiations. We show that claimholders' heterogeneous beliefs about the results of a formal plan and about judicial discretion may lead to such a preference. The proposed model predicts which resolution would be chosen under claimholders' beliefs about the determinants driving the outcome of a formal procedure, such as the extent to which firm value is affected by bankruptcy, the likelihood of deviation from the absolute priority rule, and the probability of the court adopting a reorganization plan.

Keywords: formal procedure, informal process, heterogeneous beliefs, judicial discretion, bankruptcy, liquidation

JEL Classification: G12, G32, G33

Suggested Citation

Francois, Pascal and Raviv, Alon, Heterogeneous Beliefs and the Choice between Private Restructuring and Formal Bankruptcy (December 8, 2016). Available at SSRN: https://ssrn.com/abstract=2359488 or http://dx.doi.org/10.2139/ssrn.2359488

Pascal Francois (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

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