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Bankruptcy Litigation and Relationship Banking

Author

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  • François Marini

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper analyzes how bankruptcy litigation affects the value of relationship banking. In our model, bankruptcy courts may make type 1 errors, i.e., they may declare that an insolvent firm is solvent; and they may make type 2 errors, i.e., they may declare that a solvent firm is insolvent. Our model provides four results. First, the cost of bank debt decreases when the probability that bankruptcy courts make type 2 errors increases. Second, the value of relationship banking increases when the probability that bankruptcy courts make type 1 errors increases. Third, the cost of credit intermediation decreases when the probability that bankruptcy courts make type 2 errors increases. Fourth, the diversification mechanism does not fully solve the delegated monitoring problem.

Suggested Citation

  • François Marini, 2013. "Bankruptcy Litigation and Relationship Banking," Post-Print hal-01617364, HAL.
    • Handle: RePEc:hal:journl:hal-01617364
    DOI: 10.1111/jbfa.12011
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    Cited by:

    1. Beiqi Lin & Chelsea Liu & Kelvin Jui Keng Tan & Qing Zhou, 2020. "CEO turnover and bankrupt firms’ emergence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1238-1267, October.

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