Economics of Insolvency Procedures: A Game-theoretic Approach

Date

1995

Author

Özkan, Aydın

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The purpose of this paper is to discuss the importance of the insolvency code of a country for the survival of financially distressed firms, referring to the UK practices. This paper argues that UK insolvency procedures might lead to premature and inefficient liquidations of firms. How this can happen is demonstrated with a static game-theoretic model. It is shown that under the existing procedures creditors of a financially distressed firm do not have sufficient incentive to cooperate and fail to achieve a better realisation of the firm's assets. Also, the determinants of this inefficient liquidation decision are discussed. Further consideration is given to the role of company's asset structure in creating the inefficiency problem.

URI

https://hdl.handle.net/11511/112376

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Department of Economics, Article