IDEAS home Printed from https://ideas.repec.org/a/ris/ambsrv/0114.html
   My bibliography  Save this article

A Model of Insolvency Resolution: When is Bankruptcy Inefficient?

Author

Listed:
  • Acha, Rajesh Kumar

    (XLRI - Xavier School of Management, Jharkhand, India)

  • Sarkar, Sumit

    (XLRI - Xavier School of Management, Jharkhand, India)

  • Guha, Apratim

    (XLRI - Xavier School of Management, Jharkhand, India)

  • Ayyalusamy, Kanagaraj

    (XLRI - Xavier School of Management, Jharkhand, India)

Abstract

Information asymmetry about a firm's value has been identified in the literature as an obstacle in restructuring the debt of an insolvent firm. We explore the possibility of a restructuring under complete and symmetric information between a firm and its creditors in a creditor-friendly bankruptcy regime. Using a model, we determine the feasibility conditions for restructuring. Our results show that restructuring the firm's debts may not be possible even if it is known to the creditors that the firm's value under the present management is higher than that under a bankruptcy sale. The firm's value under restructuring must also be large enough to pay the full claim of the unsecured creditor and pay the secured creditor a little more than the claim payment they receive in a bankruptcy sale. The results highlight the role of creditors' legal rights in a creditor-friendly regime in leading a firm towards a bankruptcy sale even when the creditors know that the firm's value is more under the present management.

Suggested Citation

  • Acha, Rajesh Kumar & Sarkar, Sumit & Guha, Apratim & Ayyalusamy, Kanagaraj, 2024. "A Model of Insolvency Resolution: When is Bankruptcy Inefficient?," American Business Review, Pompea College of Business, University of New Haven, vol. 27(2), pages 549-572, November.
    • Handle: RePEc:ris:ambsrv:0114
    as

    Download full text from publisher

    File URL: https://digitalcommons.newhaven.edu/americanbusinessreview/vol27/iss2/7/
    File Function: Full text
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Insolvency; Debt Restructuring; Bankruptcy Law; Liquidation;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ambsrv:0114. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amber Montano (email available below). General contact details of provider: https://edirc.repec.org/data/cbnhaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.